The world is changing fast and the industrial and logistics sector is feeling the pressure.
Population growth, new consumer habits and increased global demand for commodities are driving evolution in the sector, presenting an opportunity to developers and investors, heard delegates at last week’s EG Industrial Summit.
Last year the logistics industry contributed around £100bn to the UK economy, and this total is only set to increase. More than 8.6m people are now living in London, and the latest projections by the Office for National Statistics estimate that the city will be home to 11m people by 2050. Not only do all of these people want commodities from groceries to general merchandise, but they want them as quickly as possible. Retailers such as Amazon have already begun introducing one-hour delivery times for the capital.
“This presents staggering challenges, and the logistics industry needs to think about how it is going to do it all,” says Peter Ward, chief executive of the United Kingdom Warehousing Association.
He adds: “We are in a high-velocity fulfilment industry within a global environment, which is witnessing the biggest and fastest move of goods and services around the world.”
This change is happening on a global level as the accelerated wealth of Asian economies boosts the price of the region’s manufactured goods, he says. This means it is more likely for products to be sold locally rather than exported. We are also now in direct competition with Asian markets for goods including exotic foods.
Ward says: “This is changing the supply chain as it puts the consumer at the heart of everything. This is no longer a linear process, it is multi-channel and it is changing the whole dynamics that define the logistics industry.”
The biggest development fuelling this change is the surge in online retail sales. According to Savills, online retailer Amazon took up 26% of all UK logistics space in the third quarter of 2015 and Savills estimates that the retailer will take up almost 10% of all UK floor space by the end of this year.
These figures come as Amazon looks for distribution hubs to meet its ambitious delivery times and prepares for the launch of its grocery service, Amazon Fresh.
Mid-sized sheds are best suited to requirements of this kind. They are generally between 50,000-150,000 sq ft and serve as both last-mile distribution hubs and return sorting offices, which in time will require sites of their own, given that eight out of 10 items sold online are returned. In this market, size and location are key.
“The mid-sized units are absolutely the sweet spot now,” says Alan Holland, business unit director for SEGRO. “Getting the land is hard, but the market is very much there.”
This in turn boosts prospects for investors. Leigh Thomas, managing director, Kier Property, says that mid-box yields have already sharpened this year from 6.5% to 5.5%. According to Savills, overall industrial investment has reached £2bn this year, with £624m of stock transacted in the third quarter. Duncan Walker, director at Helical Bar, says investment in this sector has become his focus.
“Industrial forms about 25% of our portfolio at the moment, and we have invested only in logistics this year. It’s also the only place in our development pipeline where we can find value.”
But there are still not enough sheds of this size, meaning developers could have the last laugh. Savills has been monitoring each region in the UK individually, and predicts that they all only have 1.5 years of supply for sheds this size. There is only 7.9m sq ft of speculative shed development due for delivery in Q4 2015 – just 39 schemes.
Savills director of research, Kevin Mofid, says: “Every single region has an average take-up level higher than supply, and even with spec development coming through, there is not enough. Delivery is timely and necessary.”
Developers already agree that now is the time to get involved.
“You have to have the confidence to put a spade in the ground, then the occupier demand will follow,” adds Thomas.
Change is happening, and it is happening quickly. Developers have an opportunity not only to cash in on a massive opportunity, but also to contribute to the evolution of the logistics sector, which is swiftly becoming one of the UK’s most important industries.
