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The Logic of Logistics
March’s Spring Statement revealed UK inflation is predicted to peak at around 9%. That will be double the Autumn forecast. UK GDP growth is expected to level off at about 3%, half the previous forecast. Squeezed in between is the most extreme cost-of-living fall since the 1950s. That could choke aggregate demand and stall growth for businesses already facing steeply escalating input costs.
So, it is easy to see how property investors and construction employers could suddenly feel like their prospects have become fragile. However, having attended March’s Industrial and Logistics Conference there is plenty of evidence to suggest the logistics real estate business will not be slowed by these headwinds. Instead, it represents Kent and Medway’s principal job growth opportunity now and for the future.
The fundamentals of the warehouse property sector remain strong.
Firstly, although costs are rising, consumers will still shop. Someone will still need to supply their goods. One could argue, consumers facing increased cost of living will turn to online shopping more to find better prices. Equally, given the choice of retail space or warehouses, warehouse distribution offers retailers a more responsive lower cost model and stock accordingly.
The UK has the highest degree of ecommerce penetration according to research by Mastercard. Among the 15 leading markets covered, the UK comes first with 26.6% of its total retail sales coming through ecommerce at September 2021. This was down from 29.1% in January 2021. Second place was Singapore with 25.8%
Secondly, because there is underlying demand and under supply of warehouses, the market will remain buoyant. Statista Research, also in September 2021, shows the UK vacancy rate of industrial and logistic real estate is just 5%. It has been falling since 2010 when it stood at 15.4%
While costs of building increase, rental growth may slow as a result; however, given the fundamentals nothing dramatic is going to happen and rents show no sign of going the other way. With underlying demand exceeding supply, there is little space available right now. With plenty of capital looking for a home and investors needing predictable returns, logistics presents investors with an inflation hedge. Rent reviews are the best way to maximise returns in a high demand/low supply market, yet anniversary inflation linked increases can just as effectively lock in landlords and tenants to sustain capital provider’s yields over 20-year periods to offset inflation.
In any case, the cost of rent is less than 5% the cost of operating a logistics operation – salaries, road costs and energy represent more like 85%. Hence location being such an important factor and Kent’s appeal. So, it is no surprise Knight Frank’s 2022 UK Logistics Market Outlook shows, 39.7% of the UK All Balanced Property Fund Index is invested in the industrial sector in Q4 2021, up from 33.2% in Q4 2020 and from just 16.4% nine years ago. Industrial and logistics assets are set to continue to outperform all other real estate sectors. In some business parks, like Manor Royal in Crawley, it is viable to demolish new grade A office space that has been vacant for five years and replace with warehouses.
How Kent can cash in?
It is time for Kent planners to think outside the box and see the value in industrial and logistics space. Here is what they need to know:
Predictably, the response from developers and landowners is rapidly rising land prices. That’s how the market works. This is compounded by inflated construction costs; But as I have set out, with so little supply, the yield equation isn’t massively shifting. That means not much intervention is needed here right now. That can be factored into s106 agreements to ensure new facilities have high wellbeing standards, such as outside public realm spaces for staff and neighbours.
Power supply is already a critical factor. Locate in Kent has lost more than a few firms because power from the grid couldn’t be assured or provided in time for tenants. This won’t be a surprise to anyone involved in building or developing in the South East, whether it’s for employment or residential. If planners are promoting sites or examining sites for local plans, power must be given equal weight to considerations such as ecology and highways.
What is becoming a critical requirement for occupiers when assessing potential buildings with energy prices soaring is an independent green source of energy onsite. For example, the new Amazon facility at Dartford has something like 12 acres of solar PV on the roof. But we must see provision for wind, ground source and other power sources like anaerobic digesters to power the industrial units of the future and provide resilience. Planners should be looking for this at preapplication stage. New schemes that come forward without this will be less desirable and could be empty for longer.
Most developers are building new industrial unites to BREEAM Excellent or Outstanding, with an A or A+ EPC rating. The real opportunity that will come from a substantial increase in the amount of electricity the UK produces from wind power will be providing it adjacent to large employers, not vast wind farms. Kent has vast amounts of green energy, largely offshore. Tapping into this will enable us to secure the facilities with the highest employment and automation combinations.
Given the shortage of space, every potential B8 site within 60 minutes of the M25 (in other words, most of Kent) is in the prime category. Combined with tenants’ requirement for energy efficiency, planners should not be accepting any scheme that does not meet at least BREAM Excellent.
So why isn’t there more space in Kent for Industrial and Logistics?
The number one constraint to create more jobs is: the ability of developers to secure suitable development land and planning permission. This sits squarely with Kent’s local authorities. Blessed with a unique location between the London (the greatest city in the world) and the coast with the Single Market (the largest consumer market in the world) of course there is demand for space. Every square foot of industrial and logistics space creates jobs. That means skills for the future sustainability of our communities and tax income from the people doing those jobs and their employers.
The UK’s population growth is accelerating, but we need to make sure the industrial land supply is keeping pace with housing growth to service consumers. It’s essential we find new ways to facilitate new homes with modern warehouse facilities that support jobs, growth and Kent’s economy.
Research from the British Property Federation and Savills underlines that the planning system is restricting growth in the sector by not allocating land in the right locations. Supply-demand dynamics of warehouse space have been distorted since 2011, with annual take-up averaging a net 34million sq ft over the period. This was 46% higher than the net delivery for new space.
Assumptions used to designate land for industrial and logistics uses have not factored in the growth of the digital economy and are therefore outdated. Drivers that are being omitted include growth in housing, online retailing, freight volumes and the need for larger premises.
Local authorities are not accounting for the social value the sector creates, often with outdated perceptions of warehouse space and its occupiers. Logistics provide significant economic benefit via their wider supply chains through employment.
Logistics jobs range from entry level graduates to highly skilled engineering and management roles. Yet, when it comes to the planning process, wider supply chain employment is often being overlooked. Retail schemes are failing to materialise as these uses are simply not viable in the UK today. In contrast, demand for warehouse space, coupled with increasingly high industrial land values, makes development not only viable, it creates more economic value than high street regeneration.
The growth of Kent’s freight industry creates significant employment. Industrial and logistics facilities are the critical link in the chain alongside the ports of Dover, Ridham, Sheerness, Thamesport and the Eurotunnel.
The British Property Federation report on Levelling Up through Logistics shows the future industrial and logistics needs in England could be more than 4 million sqm per annum. A 29% uplift on the historic 10-year trend. If this quantum was available, the construction programme alone would support as many as 45,000 jobs annually. Yet London’s Industrial Land Commission work shows 24% of employment land has been lost to housing over the last 20 years.
Let’s combine scale with the opportunities for young people entering the workforce. Logistics employers hire over 40,000 new apprentices every year. According to the Kent Analytics March jobs data set from Kent Analytics, Youth unemployment (18-24) in Kent is higher than the national average at 5.4% and it’s increasing. That is 6,500 young people that could find immediate employment in logistics and could go on to have successful careers in diverse roles.
Simon Ryan is our Investment Director. He works with businesses and property developers to make Kent an even more appealing place to work and grow businesses. Click here for his contact details >>
Major Logistics Sites with Availability
Dartford, Goodman Crossways Commercial Park is
Further reading
Knight Frank: Logistics Outlook. February 2022
JLL: The Future of Global Logistics.
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