HOW SOON IS NOW? The disruption and evolution of logistics and industrial property - Addleshaw Goddard LLP

 
HOW SOON IS NOW? The disruption and evolution of logistics and industrial property - Addleshaw Goddard LLP
HOW SOON IS NOW?
The disruption and evolution of logistics and industrial property
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 - Addleshaw Goddard LLP
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HOW SOON IS NOW? The disruption and evolution of logistics and industrial property - Addleshaw Goddard LLP
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
HOW SOON IS NOW? The disruption and evolution of logistics and industrial property - Addleshaw Goddard LLP
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
HOW SOON IS NOW? The disruption and evolution of logistics and industrial property - Addleshaw Goddard LLP
1   INTRODUCTION AND
    EXECUTIVE SUMMARY
    Introduction

    Executive summary

    Policy recommendations

                             6
HOW SOON IS NOW? The disruption and evolution of logistics and industrial property - Addleshaw Goddard LLP
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
HOW SOON IS NOW? The disruption and evolution of logistics and industrial property - Addleshaw Goddard LLP
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
HOW SOON IS NOW? The disruption and evolution of logistics and industrial property - Addleshaw Goddard LLP
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
HOW SOON IS NOW? The disruption and evolution of logistics and industrial property - Addleshaw Goddard LLP
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

                                                                                              10
Opportunity 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

                                                                    11
As 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

                                                                                                                                             12
YIELD 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

                                                                                                                 13
residential, 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

                                                                     14
SEA 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

                                                                                                                    15
in 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

                                                               16
project 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

                                                              17
POLICY 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

                                                               18
6
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.

                                                                19
b. 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

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                                           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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