HOW SOON IS NOW? The disruption and evolution of logistics and industrial property - Addleshaw Goddard LLP
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HOW SOON IS NOW? The disruption and evolution of logistics and industrial property
2
3
INDEX
1 INTRODUCTION AND
EXECUTIVE SUMMARY 2 INVESTMENT AND
DEVELOPMENT
Introduction The investor view
Executive summary Tipping the scales
Addleshaw Goddard
Policy recommendations
A shift in shed requirements has led to big
changes for the logistics sector
M&G Real Estate
Big is beautiful: why investors are chasing prime
industrial assets
Tritax Big Box
Industrial is the high street of the future
Legal & General Investment Management
Mid-sized spread
BMO Real Estate Partners
Getting the fundamentals right
Oxenwood Real Estate LLP
Developer focus
Trophy assets: a new perspective
Addleshaw Goddard
Fitting out and fitting in: how developers are
making speculative development and mixed-use
logistics schemes work
Kier Property
The Caddick case study
Caddick Group
Omega Warrington
Miller Developments
Direct rail termini can be a boon for logistics parks
Verdion iPort
4
Market perspective
3 INFRASTRUCTURE - WHAT ALTERNATIVES ARE
THERE TO ROAD?
Challenges in the UK Logistics Market
Savills Unlocking investment for rail as well as multi-
modal sheds
A commercial property trends perspective
Addleshaw Goddard
Aberdeen Asset Management
Superports: why we need them and how to get them
A regional view
DP World London Gateway
Gent Visick
The importance of rail
MDS Transmodal
A European and global view Where needs investment, and how do we unlock it?
Rail Freight Group
A European view
CBRE Global Investors A train wagon capacity perspective
VTG Rail UK
Cheap labour and land costs are at the heart of
Europe’s eastward expansion Airport City: a view from MAG Property
Prologis MAG Property
How can the UK learn from Europe? Third Party logistics
Delin Capital Asset Management Eddie Stobbart
How do the drivers of the European logistics market
compare to the UK’s? RETAIL AND CONSUMER NEEDS AND LAST MILE
P3 Logistics Parks
4 FULFILMENT
Bespoke automation solutions are becoming less Retail is reinventing itself again
popular in the German logistics market
Addleshaw Goddard
Luther
Does the parcel boom make sharing an
inevitability?
Doddle
Digitising the supply chain
Fabacus
A 3PL perspective
Iain Speak, Consultant
Going big on small sheds
Network Space
Focusing on communication, collaboration and
partnerships to meet customer expectations on
logistics
Britvic PLC
A hybrid approach
Diageo
5
1 INTRODUCTION AND
EXECUTIVE SUMMARY
Introduction
Executive summary
Policy recommendations
6
Changing perceptions: more
than just a shed …
We call them ‘sheds’ but is that right,
fair or proper? These increasingly
technologically sophisticated centres
generate (surprisingly) high employment
and contribute hugely to the local and
national economy. So should the phrase
‘shed’ be consigned to history but if so, what
should take its place?
7
INTRODUCTION AND OVERVIEW
Informing Britain’s industrial To a large extent, the industrial
strategy property market’s performance has
been fuelled by a lack of supply:
As our report will show, the landscape demand for space has outstripped
around industrial real estate is non-existent speculative development
profoundly connected to every area which a risk-averse lending market
of manufacturing, distribution and still shies away from. As a result, the
transportation - not just retail. And performance of prime industrial real
that is why Government needs to estate is in many cases nearly in line
overhaul the way it views industrial with prime retail assets.
Addleshaw Goddard development.
Lee Sheldon To underline the turnaround since
Joint Head of Real Estate Sector All too often, considerations for 2008, IPD’s annual performance data
employment space and how future (see table across) showed industrial
Lee is a partner in our Funds cities will deal with the growing property delivered a 16.8 percent
and Indirect Real Estate Team. demand from parcel delivery firms, total return during 2015 compared
He specialises in advising both light industrial or construction firms, with 4.1 percent in 2009, largely
managers of and investors in not to mention online retail giants, fall thanks to capital growth of 10.9
UK, pan-European and global on deaf ears. Yet as Britain steps into percent. As our in-depth data from
investment funds operating across unknown waters around Brexit, the Savills shows, the sector’s turnaround
amongst others the real estate, need for a coherent industrial strategy is widespread and has occurred right
infrastructure and private equity is more vital than ever. This needs across the country.
sectors as well as supporting them to be joined up with considerations
on their downstream corporate for new hard and soft infrastructure Industrial real estate is viewed
wrapped real estate transactions - whether airports, railways, roads or by some investors as a bond-like
including indirect acquisitions hospitals. investment, largely on account of
/ disposals, joint ventures and the long leases agreed to by big box
reorganisations. Additionally, Lee One aim of this report is to inform this occupiers. Having large facilities
is joint Head of our Real Estate process by offering suggestions that close to transport links or with access
Sector Group. reflect a raft of experts from across to rail freight terminals, as offered
real estate, transport, logistics and at locations such as DIRFT or iPort,
From 28 days to 24 hours retail. Our conclusions outline how is now business critical for many
later a more strategic approach to land retailers or logistics companies.
use could better support investment
In the dystopian London of the film 28 across entire communities. Many are willing to agree index-linked
Days Later, by Danny Boyle, survivors increases in rent on 20-year leases.
of a deadly virus roam empty streets The other aim of this report is to From an investment perspective, that
and looted supermarkets. The broken evaluate the current sentiment within has made sheds far more appealing
cityscape is an apt analogy for the UK’s the market, highlighting investment to institutions and pension funds
industrial property sector circa 2008. and development experts across the unable to find yield elsewhere.
UK and continental Europe to help
Amid record vacancy levels, buildings identify emerging trends. At a time when German 10-year
were being demolished as landlords bonds are offered with a negative
sought to avoid paying business rates From bombsite to gilts coupon, even yields of 5 percent
on empty properties. Meanwhile, one represent good value. One of 2016’s
of the industry’s biggest companies This reversal in fortunes from 2008 biggest deals involved a private
was set to implode. SEGRO’s has seen sheds evolve to become Korean investor purchasing an
acquisition of its main rival Brixton, sophisticated warehousing and Amazon-let 1m sq ft fulfilment centre
turning it into a £5.5bn industrial distribution solutions which form part in Leicestershire from John Cutts’
powerhouse, exemplified the M&A of the establishment. Institutional Mountpark Logistics for £126m, at a
opportunities buried in the market’s allocations are rising and in many reported yield of 4.5 percent.
trough. Acquisition fever returned in cases, vacancy rates are lower than
2016 in spite of Brexit and elections in yields, which have compressed From a risk perspective, this is as
France and Germany on the horizon steadily amid rental growth. What this good as it gets. But one perverse
(the most notable transaction so far means for politicians is that there is observation is that while investors
being GICs €2.4bn acquisition of P3 significant weight of private capital looking at corporate bonds in many
Logistics), but the market could not ready and waiting to invest in providing fast moving consumer goods ‘FMCG’
be more different from eight years space for business to take place. stalwarts would have invested at
earlier. negative rates during 2015-2016,
8
IPD 2015 INDEX
Adapting to change
Just as businesses need to adapt
to new technology, so too must
Government policy adapt to new
business and social trends. Political
soundbites around Britain’s sharing
economy, its Northern Powerhouse or
Midlands Engine have to be matched
DATA: IPD 2015 by action.
investments in the industrial real the precipice, the Armageddon many In this environment of change,
estate those corporations occupy predicted for high street retail has not adapting antiquated and cumbersome
would typically offer more like 5-6 occurred. planning systems and policies will
percent. be crucial to bringing through the
Appetite for construction development needed. As we will
What’s changed? hear, there needs to be greater
Opportunities to buy million foot acceptance within Government of
To put things in context, Boyle’s sheds let to Amazon are few and far the role logistics will play in our
film appeared in 2002. This was between, sadly. But nonetheless, future economic growth. Cohesive
five years before the iPhone and they underline why so much interest measures need to be put in place
10 years ahead of 4G, at a time is falling on the logistics sector. A across the raft of policy areas which
when 28 days was still the typical conservative estimate would suggest play a supporting role. If Britain is to
time for the delivery of goods. more than £17.5bn worth of space is genuinely work for everyone, then
While smartphones, e-commerce now needed across Europe to fulfil we must prioritise support not just for
and mobile technology are not the current demand. And as more of the this sector, but for the wider network
only drivers of change, they have world comes online, this need will of critical elements supporting
been amongst the most significant. only grow. employment and commerce.
Their impact has resonated across
every area of logistics, transport, In the UK at least fulfilling the Regeneration and gentrification
manufacturing and investment. increased demand will not be easy is seen as a double-edged sword
- there is not enough capacity on in many urban areas. But seaside
The manner in which “28 days later” our roads to deliver everything, nor towns and industrial areas have
has been replaced by “24 hours presently enough space in our cities seen little benefit and are often
later” or even “later the same day” for the urban logistics warehouses those best suited to house many of
has fuelled a raft of opportunities for needed for last-mile fulfilment. the developments talked about in
new businesses: delivery companies, The sector therefore needs to be this report. Unlocking infrastructure
tech firms and transport firms. It has innovative and responsive to the can usher in investment if we plan
reformed the way in which supply challenges ahead. it correctly. Crucially, the delivery
chains are managed. The internet of new roads, railways and runways
has brought with it both urgency Transport has played an increasingly needs to happen soon and not 28
and transparency that never existed vital role in driving value from real years later.
before. And logistics companies have estate, and not simply from the point
stepped up to play a more crucial of view of location. As we will explore,
role than ever before in their clients’ rail is being increasingly integrated
businesses, taking on everything from into major developments - although
production and transport to short- not without considerable expense,
term finance. delay and complication. And despite
the obvious environmental benefits
The property sector has had to over road haulage, some expect the
evolve radically. We have seen the prospect of greener and perhaps
likes of Hammerson, British Land, even self-driving lorries to overtake
Land Securities and Westfield any overhaul of Britain’s rail network.
emerge successfully from this period
of change by embracing an omni- Technology too provides both an
channel and more leisure-focused opportunity and a challenge as
retail experience. But industrial occupiers look to maximise efficiency
landlords have been big winners. through the automation of stock
picking, ordering of supplies or the
Warehouse portfolios that saw management of space and staff.
vacancy rates of 20-30 percent in This drives the need to modernise
2008 are now let at record levels. And real estate, increasing demand and
just as sheds have edged back from providing growth for the sector.
9
EXECUTIVE SUMMARY
The e-commerce RETAILING
revolution
90
Everything on demand 80
E-commerce has changed our world. 70
We can sit in our armchairs and 60
buy furniture, order our groceries or
50
purchase a gift from the other side of
the world and have them all delivered 40
to our doorsteps in a matter of hours 30
(or days in the case of the exotic gift).
20
To allow this to happen, the logistics
world - the warehouses that exist to 10
store and process our orders and 0
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Doc Jan Feb Mar Apr May Jun Jul Aug
the network of transport, delivery or 2013 2014 2015 2016
collection points that exist to get them Internet as % of all retail Non-store retailing
to us - has seen dramatic and rapid
changes. E-commerce has seen a steady increase in uptake in recent years, increasing by just over 1 percent as a
proportion of all retail each year since 2013. DATA: ONS
This report examines the scale of
those changes and the implications penetration rate far higher than in pressure on the nation’s high streets,
for consumers, logistics providers other European countries, helped shopping centres and retail parks.
and the investors who build and along by widespread Smartphone, 4G
own the warehouses that allow the and Wi-Fi access, British consumers There is increasing competition
growing internet retail sector to fulfil are more likely to be online and within between online retailers, with the likes
its customers’ increasingly immediate easy reach for delivery. of Amazon and Argos emphasising
needs. We also look to the future, and the speed of their delivery to win
the technology and developments As of August 2016, according to the custom. This speed comes with
that will shape the retail and logistics Office of National Statistics, online considerable extra cost for additional
sectors over the coming years. sales constituted 14.3 percent of UK warehousing and delivery fleets (as
retail, and are projected by the Centre we will see below) which is a cost
Challenge for retailers for Retail Research’s Retail Futures that only the biggest companies can
2018 report to grow to a 21.5 percent absorb.
The UK has become a crucible share of retail sales by the end of
for the fast-growing trend towards the decade. That is good news for
instant delivery. Living in a small, retailers with an online capability, but
dense nation, with an online retail it will continue to place competitive
2011 2016
3PL
3PL
Automotive
Automotive
Food Production
Food Production
Grocery Retail
Grocery Retail
High St Retail
High St Retail
Manufacturing
Manufacturing
Online retail
Online retail
Parcel
Parcel
The data on the share of space leased by occupier type shows the pronounced shift towards online retail over the last five years. DATA: Savills
10Opportunity for shed Asset Management, three times as occupiers, they are often view as
providers much warehousing space is required lower risk that other asset classes.
for online fulfilment compared with
The growth in internet shopping has store-based fulfilment, and for every Just as international occupiers
benefited those property companies €1bn spent online, an additional demand huge spaces for national
and institutional investors that 775,000 sq ft of warehousing space is or regional distribution centres, so
develop and own warehouses and required. locally-based businesses require
logistics centres. More facilities are more modest amounts of industrial
needed in easily accessible locations This fits with Savills’ data showing space. While higher yields often
and differing sizes - from big box that take-up for online retailers for UK reflect the lower covenant strength of
floorspace measured in football sheds space in 2016 so far is almost tenants, many multi let occupiers will
pitches, to small local delivery centres equivalent to take-up for the rest of potentially be major businesses.
for the last mile of the journey. For the decade: 8.5m sq ft of space has
the biggest retailers, their demands been provided in the year up to June Of course the bulk of multi let, by
for their big boxes are precise. They 2016, compared with 9m sq ft of volume, will be small properties which
want advanced ‘four-dimensional’ space between 2010 and 2015. are nevertheless attractive to income
automation that can pre-pack investors who would be unlikely to
complex online deliveries in the most Growth in size get a 8-9 percent return anywhere
efficient order possible, customised else. Larger investors are continually
to work with state of the art robotics, There has been a sea change in on the hunt for large portfolios which
and typically with multiple mezzanine occupier preferences, with four enable substantial capital to be
levels to double or even triple the times as much take-up in 2015 deployed.
floorspace available inside the being built bespoke to the occupier’s
building. requirements, rather than speculative As our report shows, increased
development. Occupiers are appetite from 3PL business,
These demands have created an increasingly looking for bigger sheds, parcel delivery firms and those
asset class of individually tailored and both to future proof their operations manufacturers re-shoring work closer
expensively kitted-out sheds, with and drive economies of scale. The to home will all drive demand for multi
commensurately sized rents, almost first half of 2016 saw five deals lets. And as technology such as 3D
unrecognisable from the simple made for sheds over 500,000 sq ft, printing makes local manufacturing
warehouses with racking and hangers compared with a long-term average of cheaper and more workable, there is
that were standard for the industry seven 500,000+ sq ft deals per year. a huge amount of potential for hubs of
just 20 years ago. activity to spring up.
Growing in appeal
From a cost to a profit centre
But just as you cannot have a
For retailers with the wherewithal to conversation about industrial property
own their own buildings, sheds have without mentioning Amazon or Tritax
evolved from assets that used to be Big Box, so too do smaller, cheaper
a necessary cost, to ones that are multi let industrial properties have an
now a vital source of their company’s increasing appeal. With low capital
profits. Moving more of their values relative to floor space which
operations to industrial property for are mostly below rebuild costs; low
online sale fulfilment allows retailers refurbishment costs given their simple
to cut overheads such as labour costs build and a broad base of potential
and expensive retail rents - although
the transfer of delivery costs from ONLINE RETAIL
the consumer to the retailer means 9,000,000
that “location, location, location”
8,000,000
and accessibility to the consumer is
fundamental to delivering these costs 7,000,000
savings. 6,000,000
5,000,000
The impact on industrial 4,000,000
property 3,000,000
2,000,000
Growth in demand
1,000,000
The move towards online retail has 0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 YTD
brought with it an increased demand Online retail
for industrial property. According to
The online retail boom is a partial reflection of Amazon’s highly aggressive purchasing policy. DATA: Savills
research by Prologis and Aberdeen
11As the economy recovered following
100000000 12000000
the recession, the demand for
90000000 warehousing space began to eat into
80000000
10000000 the massive cache of oversupply
generated during the speculative
70000000
8000000 boom leading up to the financial
sq ft spec development
60000000 crash. UK supply has fallen from
sq ft supply
50000000 6000000
its 2009 peak of 94m sq ft of space
to 27m sq ft (mostly lower quality,
40000000
4000000
smaller units), and vacancy rates for
30000000
units over 100,000 sq ft are currently
20000000 less than four percent in all of the
2000000
core distribution markets in the UK.
10000000
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
0
The shortage of space is not the only
Logistics Supply (LHS) Logistics speculative development (RHS)
thing pushing up property and rental
values. Online retailers will pay a
The strong growth of the logistics sector this decade has fed off the glut of space built speculatively before
the crash. DATA: Savills premium for well-located sites with
advanced fit-outs that allow them
to get an edge on their competitors’
fulfilment times, particularly ‘last
mile’ sites located near urban
conurbations. Prime smaller sheds in
VACANT SUPPLY BY SIZE areas such as Enfield now command
16,000,000
average prices of £11/sq ft, compared
with £8.50/sq ft just four years ago.
14,000,000
Furthermore, occupiers are now
12,000,000 much more willing to sign up to
longer leases of 20 or more years, to
10,000,000
spread the expensive investment in
8,000,000 technology over a longer-term period.
6,000,000
Growth in investment appeal
4,000,000
The result of all these trends has
2,000,000
been to turn warehouses into a
0
0-100,000 100-200,000 200-300,000 300-400,000 400-500,000 500+
bond-like asset. With long leases
Sq ft being taken by reputable companies,
The remaining space is typically in smaller size brackets, focused in the Midlands. DATA: Savills and the opportunity to invest large
amounts of funds in shed construction
- over £100m for some of the biggest
buildings - the asset class is now
Growth in rental value highly attractive to institutions such
as pensions funds, which are on the
AVERAGE LOGISTICS RENTS
lookout for reliable long-term income
14.00
returns. With UK Government bonds
trading at near-zero yields, and many
12.00 companies offering negative yielding
corporate bonds, the five percent on
10.00
offer from prime logistics provides
8.00 especially advantageous returns for
risk levels similar to bonds.
6.00
4.00
2.00
0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
East Midlands East of England London North East
North West Scotland South East South West
Wales West Midlands Yorkshire & the Humber
The rental surge is particularly pronounced in London, the South East and the Midlands. DATA: Savills
12YIELD COMPARISON Urban logistics
12.00%
Shortage of suitable land for
10.00% logistics
8.00% With the UK having 424m sq ft of
existing warehousing space, most
6.00%
prime locations for logistics have long
since been developed. Developers
4.00%
face a conundrum: many of the sites
2.00%
remaining that are conveniently
located by motorways suffer from
0.00% other problems, such as high
Jan-96
Jan-90
May-91
May-97
May-03
May-09
Jan-92
May-93
Jan-94
May-95
Jan-98
May-99
Jan-00
May-01
May-05
Jan-06
May-07
Jan-02
Jan-04
Jan-08
Jan-10
May-11
May-13
May-15
Jan-16
Jan-12
Jan-14
Sep-02
Sep-12
Sep-90
Sep-92
Sep-94
Sep-96
Sep-98
Sep-00
Sep-04
Sep-06
Sep-08
Sep-10
Sep-14
remediation costs for brownfield, or
LOGISTICS PROVINCIAL OFFICE PRIME RETAIL WAREHOUSE
poor utility connections, which both
PRIME SE OFFICE PRIME HIGH STREET pose a threat to scheme viability at
the development stage. Compounding
Logistics and prime retail warehouse yields have been roughly comparable to office and high street yields in
recent years, despite arguably being less likely to see tenant default. DATA: Savills the issue is the UK’s notoriously
restrictive planning system, which
restricts development on the green
belt, as well as the typically limited
popularity of proposed greenfield
REQUIRED LOGISTICS SPACE industrial developments for logistics
30000000 with locals.
25000000
According to Colliers’ estimates,
to keep pace with an e-commerce
20000000
sector making up 20 percent of
UK retail, the UK/Ireland market
15000000
will require 18m sq ft of logistics
10000000
space to be built annually - far
ahead of the 3.5m sq ft projected
5000000 to be built over the next 12 months
by Savills. Therefore, measures
0 to unlock viable land are of vital
UK/Ireland Western Europe Visegrad 4+Baltics
importance, with proposals including
Logistics Space sq ft/year required. Lower range (Trad Retail) Logistics Space sq ft/year required. Higher range (All E-retailing) the streamlining of local planning
Logistics Space sq ft/Year required. Based on current e-retailing Logistics Space sq ft/year required. Based on 20% e-retailing systems to empower the fast-tracking
Logistics Space sq ft/year required. Based on 40% e-retailing
of uncontroversial applications, as
well as the establishment of funding
With over 18m sq ft of new warehousing space required annually to meet 20 percent e-commerce retail
requirements, the current development pipeline falls far short of requirements for the UK. DATA: Colliers. similar to that provided by the
Homes and Communities Agency, to
assist industrial developers with the
remediation of land.
UK DEVELOPMENT PIPELINE
Pressures in urban areas
4,000,000
While sheds are an essential
3,500,000
component of e-commerce, deliveries
3,000,000
depend on the ‘last mile’ fulfilment.
Finding suitable sites in cities for
2,500,000 such local distribution centres can
be very difficult because of high land
2,000,000
values, the general availability of
1,500,000 suitable sites, and the acceptability
of having transport-heavy occupiers
1,000,000
located in, or near, residential areas.
500,000 However, urban hubs will become
even more essential as e-commerce
0
South East South West Inner M25 East Midlands North West West Midlands UK continues to grow and delivery times
2016 Q4 2017 Q1 2017 Q2 2017 Q3 shorten, so solutions must be found.
With over 18m sq ft of new warehousing space required annually to meet 20 percent e-commerce retail Last mile solutions may be included
requirements, the current development pipeline falls far short of requirements for the UK. DATA: Savills
in mixed-use developments featuring
13residential, but their acceptability will England’s road network will see 2019 in order to ease congestion
largely be a matter of sensitive design £15.2bn of investment in over 100 issues. Although rail freight is in
and limitations on the size of vehicles schemes to add 400 extra lane miles direct competition with passenger
that can be accommodated. of capacity by 2021. However, road rail for any additional capacity, the
widening schemes are notoriously completion of HS2 and Crossrail
Whether the surge in investor interest susceptible to ‘induced demand’ should free lines enough on the West
in the prime logistics end of the (where people take journeys they Coast and East Anglia Main Lines
sector will also be experienced in the would not have taken otherwise to allow more freight to be delivered
growing ‘urban logistics’ sector is yet because the extra capacity now through Felixstowe and London
to be seen, but there is little doubt exists) filling in any capacity gains Gateway ports to the Midlands.
that the smaller boxes serving this fairly quickly, particularly as the
need will come into their own as a number of road users continues to However, scepticism remains as
subsector of the asset class. grow. to the extent rail can be a popular
option for UK logistics. It currently
Re-use of trade and retail The case for, and against, rail constitutes around 12 percent of UK
parks freight by distance, and, given the
Some are looking to the European density of the UK delivery network,
One potential source of urban logistics sector’s greater use of many consider it unlikely that rail
logistics space could be the re-use rail as a potential inspiration. Rail will be able to present a simpler and
of vacant units on multi-unit trade freight costs are competitive over cheaper option than delivering by
parks - some around the M25 are longer distances where they begin or road for distances of less than 100
now worth more than nearby retail end at a rail terminal, but are more miles.
parks, with the devaluation of retail
EUROSTAT MODAL SPLIT
land. Retail parks could also be used,
taking advantage of their large sites,
24/7 operations, massive car parks
and the fact they look like sheds. The
investment case cannot be made
quite yet, because of how land for
retail parks has been priced. There
has to be a certain rental level to
compensate for high use value, and
industrial rents have not reached
that level. The current temptation
for asset holders will be to convert
underperforming retail to residential
or office space (if possible), given the
much higher rents on offer. However,
if parcel distribution growth continues
at 20 percent per annum, things
could certainly change in the next Rail/road freight split across Europe by distance, as of 2013. The UK’s use of rail freight lags far behind other
two or three years, particularly in nations. DATA: Eurostat
advantageous locations.
expensive than pure road freight if Ports and multimodal hubs
goods have to be transported by road
Transport to the rail terminal at one, or both, One way of reducing the costs of
ends of the journey. rail is by delivering hubs that allow
The dominance of roads direct rail delivery. As a result, some
However, the rail network has its own developers are building multimodal
Transport is a pivotal consideration in congestion and capacity issues, and logistics parks with dedicated rail
logistics. Road freight makes up nearly infrastructure investment is sorely termini, such the iPort in Doncaster.
90 percent of total UK inland freight needed. The growth of the Central
transport by distance, but the network and Eastern European logistics Sea freight has grown steadily over
is increasingly congested, leading market, after extensive EU investment the last 20 years, with container
to a 2mph fall in average UK vehicle in road, rail and sea connections, traffic to the UK standing at an all-
speeds in the five years leading up to shows the potential such investment time high figure of 63.2m tonnes in
2015. Additionally, the Road Haulage can unlock. Poland, for example, 2015, compared with 42m tonnes
Association has announced an unmet now has a direct 11-day rail freight in 1995, the earliest available data
need for 60,000 HGV drivers. Late connection with China, dubbed ‘the point. This expansion - which has
deliveries increase costs for third party new Silk Road’. accompanied a 40m tonne increase
logistics firms (3PLs), an incredibly in roll-on-roll-off freight for vehicular
competitive sector with notoriously Network Rail is investing more than transport - has been enabled in
tight profit margins. £25bn into the UK rail network by part due to the decline in liquid and
14SEA FREIGHT
600,000
500,000
400,000
300,000
200,000
100,000
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
All bulk traffic Container traffic Roll-on/roll-off traffic All container and roll on - roll of traffic All traffic
Sea freight has consistently declined by thousand tonnes delivered over the last twenty years, though
container traffic and roll-on-roll-off freight has increased substantially as a proportion of all freight
DATA: ONS
dry bulk traffic, primarily for fuel. that industrial logistics property
However, port capacity has been will be the only sector to see rental
limited by rail capacity out of the growth next year.
ports - a phenomenon which spurred
the development of larger sheds in Competition from Europe
the North during the ‘00s to take
advantage of spare capacity at ports The UK market is particularly
such as Grimsby, compared with influenced by its land constraints,
Southampton. which is good news for land and rent
values, and vacancy rates, which
As such, rail capacity improvements are some of the lowest in Europe.
for ports such as Felixstowe have However, it limits the opportunities
been prioritised, and new port for investors. Some are increasingly
developments such as London looking over the Channel. Western
Gateway have made the installation of European sheds, particularly in
extensive logistics parks and multiple Benelux, offer occupiers a stable base
railheads pivotal to their schemes. in often comparatively favourable
tax regimes, with access to skilled
labour. The Central and Eastern
European market has seen a boom in
Future trends recent years in the wake of extensive
European Union infrastructure
Rental growth and lack of investment, with occupiers attracted
supply by a mix of low labour costs and good
connectivity with Germany and the
The short-term future for the logistics rest of the continent.
market looks fairly predictable.
Continued rental growth in the Skyscraper sheds
UK seems to be a given for the
foreseeable, with rents remaining Up until now, the prevailing view
stable in Europe without the among UK-based investors is that
pressure of land constraints. The multi-storey facilities are difficult to
flood of speculative development fund and even harder to build. The
before the financial crash, which X2 facility near Heathrow - which has
has steadily been taken up over four, 6 metre high units on each of its
the last eight years, is unlikely to two levels - was built by now-defunct
be repeated, particularly as the Brixton. While it was the UK’s first
trend towards bespoke pre-lets is ramped warehouse, few have sought
decreasing the appeal of riskier to replicate it.
investment in building generic sheds
without a tenant. The Investment However, the combination of
Property Forum’s forecasting across technology, increased rents, a
commercial real estate has projected lack of available land and changes
15in occupier demand could be Some of Asia’s tallest warehouses
able to change all that. Across
Asia, 20-storey high warehouses Kowloon Bay Sunshine Kln Bay Cargo Ctr
are commonplace. While we are
unlikely to see anything of that scale Tsuen Wan Global Gateway (Ramp access)
right away, the advent of modular
construction and artificial intelligence Tsuen Wan Kerry Cargo Centre
could fascilitate both the build and
operation of more complex facilities. Kwai Chung ATL Logistics Centre
Amazon is already having a multi- Kwai Chung HK International Distribution Centre (HIDC)
storey warehouse built for it in Tilbury,
and with automation and use of Kwai Chung Modern Terminal Building (MTL) (Ramp access portion)
robotics growing quickly, the potential
for retail and logistics occupiers to Kwai Chung NWS Kwai Chung Logistics Centre
make better use of space is huge.
Parcel delivery firms and others Tung Chung Airport Freight Forwarding Centre
whose business requires being
close to urban areas will be the main Shatin Evergain Centre
drivers.
Shatin Grandtech Centre
Although the cost and construction
risks with such facilities will be far too SS/ Fanling Kerry Sheung Shui Godown
high for any speculative development,
multi-storey sheds will come to Tsing Yi Interlink
represent the ultimate “build to suit”
facility. Tsing Yi Asia Lo
Sharing economies of scale
of all transport emissions, and 1. Google is famously testing a
While multi-tenanted developments approximately seven percent of UK prototype for the driverless car,
are commonplace, shared facilities carbon emissions all in all. which it predicts could be road-ready
- where two tenants or more share a by 2020, but from a logistics angle,
single big box - are less popular. In From a real estate perspective, the operators may be more interested in
a climate where investors see strong Minimum Energy Efficiency Standards the trials for ‘HGV platoons’ currently
demand for large-scale pre-lets, a due to come into effect from April being funded by the UK Government.
more complex approach to obtaining 2018 are a potential concern, with These platoons would involve
the same income stream is unlikely re-letting of assets with an Energy driverless convoys of up to 10 trucks
to be preferable. But as the market Performance Certificate rating of less closely following one truck with a
evolves, we may well see more than E forbidden from that point. All human driver.
occupiers sharing. existing leases for properties rated
at less than E will be terminated in 2. Prohibitively high development
Facing the strain of costly technology April 2023. However, developers costs and disagreement even within
upgrades and staff costs, the and investors are moving towards China on their viability as a rail
potential to reduce these risks building greener sheds, as well as solution mean that we are probably
and move manpower around to incorporating clean energy generation unlikely to see transcontinental
deal with peaks and troughs in methods such as solar panels or 270mph magnetic-levitation train lines
demand makes sense. It’s already waste processing schemes into their connecting East with West any time
something occupiers do and is more assets. soon.
commonplace in Europe. And while
figure regulations and other historic Market disruption - known 3. More creatively, Switzerland has
red tape are cited as barriers to it knowns in transport and data seen proposals for subterranean
happening more in Britain, we believe sheds connected by Elon Musk’s
such problems will fall away. Some infrastructure proposals seen in much hyped 760mph ‘Hyperloop’
recent years would at first seem more concept - something which would
Environmental concerns suited to a sci-fi movie than as long- certainly be one interesting answer to
term solutions for running containers the UK’s land constraints crisis, if it
As a sector so dependent on road to sheds. Nevertheless, should any comes to fruition.
transport, the logistics sector of the proposals prove viable (both
inevitably emits a substantial amount technically and in cost), they would However, as much as it is easy to get
of emissions. The sector is estimated undoubtedly transform logistics as we excited by the transport technologies
by the Freight Transport Association know it. of the future as logistics solutions, it
to be responsible for 30 percent is worth recalling that the UK’s HS2
16project is not forecast for completion another. How the Internet of Things
until 2033. Given the substantial can develop further to generate even
development times involved, more efficiency for the sector is not
infrastructure investment may be known; what is considered inevitable
better focused on delivering capacity is that it will do so.
improvements using technology
we already have in hand, before Of course, there is the ultimate
considering investing in unproven disruptor that is the free market: for
technologies still under development. every Blackberry, there is an Uber.
Plenty of unknown unknowns will
From a data perspective, network no doubt emerge from the constant
upgrades such as 5G will doubtless tumult of start-up innovators.
encourage further penetration for
online retail. Efficiencies could
be driven further by co-ordinated Conclusion
logistics technology platforms,
which would increase the viability of The fundamentals for industrial real
existing sheds customised to bespoke estate are strong and at the prime end,
technological fit-outs. In addition to the asset class has become almost
this, a standardised platform which economically countercyclical - seeing
saw widespread use would open the growth when other sectors of the
possibility of the big data generated market are faring less well. Technology
by the platform being used to identify will undoubtedly put more power into
further efficiencies in supply chains, the hands of both consumers and
both within automation and within occupiers, changing the way people
national and regional logistics buy goods and how companies
networks. manufacture and move them around.
No one can yet predict the full impact
From a market disruption perspective, of emerging innovations - be they
manufacturers and wholesalers - driverless vehicles, robotics or big
particularly of generic goods less data. But if the last few years have
likely to receive substantial mark-up taught us anything it is that anything
from branding - could emulate the can change. Sheds are evolving
Asian market and start selling directly to meet the demands of their own
to consumers. By cutting out the retail customers - be they manufacturers,
middle man, this would generate delivery firms or e-commerce giants.
substantial increased demand With the right political support, the
for sheds as fulfilment centres, sector can play an increased role in
particularly near ports delivered to by driving our economy and become an
international manufacturers. ongoing driver of returns for investors.
Disruption - known unknowns
Brexit is the clear standout known
unknown. However, the general
assessment of the sector is that
e-commerce will continue to grow,
even if the retail sector as a whole
sees a downturn from the outcome of
exit negotiations.
Third party logistics firms are already
making use of the Internet of Things
(the widespread networking and
monitoring of a firm’s physical assets,
such as vehicles or pallets) as a
way of improving the efficiencies
of their supply chains by reducing
empty capacity in their delivery, or
calculating how delivery routes could
be made more efficient to reduce
distances between dropping off for
one customer and picking up from
17POLICY RECOMMENDATIONS
much more simple on the continent.
Following extensive research and discussions with There is much Britain can learn from
industry-leading real estate, logistics, transport and retail these countries that would serve both
to increase investment and to reduce
experts, we have set out 12 policy recommendations
public sector expense.
to feed into the Government’s industrial strategy and
3
support further refinement of transport and planning overnment should work
G
in conjunction with the
policy. private sector to bring
forward more public land
1 2
G overnment must for designated uses
ouncils should be made
C
recognise the importance to designate land for
of logistics and industrial industrial use
There is a shortage of land
property to the country’s identified for industrial use. The
economy While nobody could deny the need for sites that are still available tend to
housing across many communities, be either greenfield (which can be
The success of the country’s historic businesses and uses (which controversial, and therefore difficult
economy is, in large, part dependent have less aesthetic appeal), are to develop), or a long way from key
on its manufacturing and retail pushed to the boundaries of our junctions. The problem has been
sectors, which together make up 21.3 cities. It has been routine for old exacerbated with the turnaround
percent of the UK’s GDP, contributing industrial sites to be replaced by of the economy, better fortunes for
£331bn towards the economy and supermarkets or homes, following manufacturing and the rapid growth
employing seven million people (22.6 compulsory purchase orders (CPOs). of internet retailing. This growth in
percent of the workforce) all in all. This can be seen in east London, demand for industrial space, and the
These companies are dependent on where the Olympics regeneration dwindling supply, has seen rents rise,
industrial property and warehousing, district saw many former industrial putting pressure on business costs.
well funded road and rail networks, uses also face CPOs. We need a The Government needs to encourage
and a tax system which encourages balanced economy that has the right local authorities to identify more land
investment. While it is vital that there mix of homes and employment space. for industrial development, and in
are sufficient homes for our growing suitable locations near to transport
population, the need for industrial The new housing and planning networks and junctions. Finding uses
space must not be overlooked purely minister should encourage local for public land could create long term
because it is not seen as a short-term authorities to prioritise properly income for cash-strapped councils as
vote winner. thought-through employment policies. well as Government departments.
Housing policy trumps employment
Industrial and logistics buildings policy within local planning, which Finding innovative ways to create joint
provide a wealth of employment is not necessarily always the best ventures with investors to provide big
opportunities, both in the low-skilled priority. There should be far greater box warehousing or local distribution
jobs historically associated with the curation of uses, and this must be hubs, could generate significant value
sector and the increasingly highly- intertwined with greater clarity at a for the long term.
4
skilled, specialist jobs created from national level.
modern manufacturing, logistics and G overnment should
e-commerce. The sector is a vital We should also consider what look to directly support
source of employment outside London different types of industrial sites are development by SMEs
and the south east, particularly in the now needed. The changing nature
Midlands and North, and in coastal of the economy means the built Many sites that could potentially
areas that have been largely forgotten environment also has to change. support industrial development are
at the expense of our cities. How we resolve this will take careful unlikely to be unlocked because of
consideration. But, crucially, we the lack of infrastructure - such as
There needs to be a top-level must recognise that if consumers roads, power or sewerage - and the
acceptance of the role these sectors want products within 24 hours, prohibitively high cost of providing it.
will play in our future economic 60 minutes or virtually instantly, The Regional Development Agencies
growth. Additionally, there needs then infrastructure, real estate and (RDAs), abolished in 2012, were
to be cohesion in the measures transport will have to support this. an important source of funding for
taken across the raft of policy areas infrastructure. They bridged the
which play a supporting role. If we The federalised structure of Germany gaps between local authorities,
are to have a Britain that works for and Holland’s zonal planning an important way of recognising
everyone, we must prioritise support structures and building regulations that infrastructure spending often
for industry. both make development and planning benefits adjoining council areas. The
186
financial power available now to Local P roperly coordinate collaborates more closely with
Enterprise Partnerships is very limited transport infrastructure Network Rail to better integrate
compared to that of the RDAs. capacity between road and rail
considering how we can better use
The Government needs to consider We must ensure that major projects off-peak periods during the night. A
a greater role for the Homes and contribute to the logistics network single strategy delivered by Highways
Communities Agency, which has effectively, and that growing needs England and Network Rail would
£4.7bn of grant funding available are supported through what we are better serve the needs of logistics
for affordable housing, to kick-start creating. businesses.
8
industrial development with a similar
kind of budget for land assembly, We should also clearly set out sing finance and
U
remediation (cleaning up sites) and the routes of major projects at technology to drive
above all, installing vital infrastructure an early stage, avoiding costly increased rail freight
that could offer many broader benefits delays at planning, and allowing capacity
to both employment and housing investment to be deployed early. We
delivery. have a plethora of National Policy The Department for Transport’s own
Statements on energy and transport, national policy statements make the
Given that funding is limited, the but not one of these sets out any case for rail freight being greener
other route ministers can take would site-specific policies, apart from on and more efficient. While many
involve debt guarantees that could nuclear power. companies with the scale to benefit
better support the financing of do use it, for the majority it is too
difficult schemes such as pre-let and Policies around Nationally Significant expensive and the complexity of
schemes built to suit occupiers form Infrastructure Projects, when national access rules it out.
the majority of new developments. policy statements apply, are too
Measures in the housing market to vague and open to interpretation. Due to the relatively short distances
underwrite development finance and covered domestically (compared to
then syndicate it to the bond markets The final part of this is reforming the those on the continent), and the high
provide both a good investment for Development Consent Order (DCO) cost of access, rail transport is not
fixed-income buyer, and a lifeline of process, which applies to significantly a viable option for many companies.
funding for those needing to access sized infrastructure projects such as The situation will become worse as
more reasonably priced finance. airports, harbours, railway alterations, passenger numbers increase and
5
and construction of rail freight the line space available for freight
I nvest in and empower interchanges. The DCO process is diminishes. HS2 and 3 will free up
local planners long, complex and expensive, which lines in the centre of the country, but
is a disincentive. There’s almost an they will not benefit many of those
incentive to keep things small and moving freight from coastal ports to
Developers and ministers routinely simple so they stay within the local central hubs.
criticise local planning for being planning regime.
slow. The complexity of the planning There are several things that should
process, and the many contradictions Additionally, the recent decision to happen:
between national policy declarations build a third runway at Heathrow must
and local concerns, are exacerbated go ahead without further delay. The a. H
armonise access contracts
by the shortage of planning officials government should do everything so they can function
and lack of Government investment in in its power to expedite this long alongside real estate leases
the profession. overdue expansion.
7
At present, there is a disparity
Government should give greater B etter road transport between the amount of time an
delegated powers to planning officers occupier, such as a supermarket,
so that non-contentious applications can rent a warehouse and the length
can be dealt with and approved of time it can contract to access the
without unnecessary delay. Above The Government has already invested rail freight network. Leases for major
all, it needs to better resource the significantly in road improvements distribution facilities are routinely in
system. Developers are largely over the past six years, particularly excess of 20 years, because of the
content to pay a surcharge to support on the M1 and M6, and has vast expense occupiers incur in fitting
quicker processing of applications committed to further investment, out the sheds with complex plant
and a better, more rigid structure to but the pace of investment must not and technology. However, the lack of
enable this to happen in a transparent be slackened. The number of road certainty around rail access massively
fashion should also be prioritised. users is continuing to rise, mitigating undermines confidence. After all,
the improvements that have been why invest in a huge facility reliant on
delivered. rail access when that access is not
guaranteed? We need to harmonise
In addition to road improvement, these disparate areas of regulation so
we propose that Highways England they better support investment.
19b. B
etter use of technology that can help to overcome these gaps doesn’t necessarily need to involve
to manage the network and are in evidence. One such example collecting less money. It means
incentives to create new is in Sherburn-in-Elmet near Leeds, more frequent revaluations as well
rolling stock where LGIM is creating the world’s as ensuring that those who have
biggest modular housing factory, seen their property’s value decrease
At present, rail freight is subservient which will be able to factory produce and are eligible for a reduction are
to commuter trains on the network, housing units and reduce building properly reassessed to keep bills in
and the need to operate in the times by 70 percent. Techniques such line with property values as much as
gaps between passenger trains is as this will allow the construction possible.
often made more difficult by delays, industry to focus more on off-site
sometimes caused by damage to development. Modern methods could a. E
xemptions for speculative
the track from excessive loading. By generate huge investment for regional schemes
incentivising the use of more modern areas, revitalising and creating
freight carriages - either through the new industrial space and creating For any speculative development, the
tax system or through Network Rail’s significant employment. Government should not levy rates
Track Access Charging System - we until the building has a tenant. This
could see less damage occurring on There has to be some overarching would encourage more investment,
our railways, which would increase Government acceptance of the leading ultimately to higher tax
capacity. There is little incentive to need for wholesale reform of the revenues occurring more quickly.
invest in new rolling stock. This needs construction sector and we call on The charging of business rates on
to be better coordinated. ministers to adopt all the findings empty properties is a disincentive
from the recent Farmer Review, using to the speculative development of
c. R
ationalise charges this as the basis for the construction industrial and logistics property.
sector’s own industrial strategy. Some local authorities delay entering
10
If the Government wants to move speculatively built properties in
more freight off the roads and on aking business rates
M to the national rating list until
to rail, it will need to ensure that transparent and fair for the building has been occupied,
the charges paid for accessing all ratepayers removing the empty rate risk and
the rail network are fair. Currently, making development more likely.
there is not a level playing field, as We call on the Government to The Government should set national
the free road network is obviously keep its previous promises around guidelines for this rather than just
more attractive for most transport radical reform of business rates. The leaving the choice up to individual
companies. business rates regime has become councils.
increasingly onerous, largely because
If the Government wants to attract it is the only tax which increases b. Levelling the playing field
private investors to fund new in times of economic downturn. On
rail infrastructure, it will need to top of this, recent changes to the There has been discord from
guarantee the return for investors. appeals system as set out under the ratepayers around the disparity
Infrastructure investors normally ‘Check, Challenge, Appeal’ system between industrial online retail
expect their payback to come over have led to a far less transparent occupiers such as Amazon and
time from the charges paid for the system, restricting the basic rights traditional high street bricks and
new services. This is harder for of rate payers to understand the mortar retail. However, unlike all
freight, because the charges paid are basis upon which their original bill other non-domestic properties,
essentially governed by regulation, was calculated. This avoidance of industrial stock is valued on the
and if they do increase, customers full disclosure is not only unfair, basis of the equipment inside and
would be to likely to move back to but also potentially damaging to the rise of mezzanine, high-tech and
road rather than pay them. economic growth. We need Britain multi-storey sheds could lead to a
9
to be perceived as being open for levelling out in the difference between
F ocus on skills business and fully transparent: while industrial and high street retailers
we seek to attract companies with low rates bills.
corporate tax bills, the increasingly
punitive nature of business rates will c. More frequent revaluations
One of the biggest risks to many of have them seen as a stealth tax.
Britain’s business sectors is our future The consultation earlier this year
pipeline of skills. This is in evidence Business rates generated £27.8 on increasing the frequency of
both in the road haulage sector, billion across Britain for the Treasury property revaluations for calculating
which currently has an employment last year. With the forthcoming 100 rateable values for business rates
shortfall of 60,000 hauliers, and percent devolution of rates to local was a welcome first step. The current
similarly in construction, which faces authorities, ministers will not be frequency of revaluations once every
an estimated shortfall of 700,000 keen on any measures that reduce five years (with next year’s updated
workers over the next five years. revenues and increase the need for valuation to be the first in seven
supplementary funding for councils. years) presents many taxpayers in
However, technological advances However, making the system fairer London and the South East with steep
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