We welcomed a group of logistics developers, investors and operators to our London office for a roundtable discussion on current issues in the sector. This note is a bite sized summary of our discussion.
Our first discussion looked at the planning system, with the acknowledgement that change is required. We asked what needs to change and how this can be bought about, and whether there is an opportunity to improve the perception of the sector among local and national decision makers.
Can the perception of logistics be changed among decision makers?
It was no surprise that our guests expressed frustration that developers continue to face issues and the process for obtaining planning permission remains inefficient even on brownfield sites. Unfortunately, the sector still faces a perception problem and local decision makers do not give enough recognition to regional and countrywide benefits of a logistics development sufficiently to offset local community concerns.
A number of interesting observations were made by the developers in the room, particularly in respect of promoting job creation at an early stage in the planning process. As new sheds become more automated, there will be demand for higher skilled and better paid jobs. This is obviously a key message to get across to local councillors, without any suggestion that this would also result in less jobs. The move to automation will lead to warehouses becoming more efficient and productive, with higher throughput, requiring the same number of employees – and not to the same levels of productivity using fewer employees.
It was recognised that discussions on the planning system led by the BPF at UKREiiF were positive. Our guests agreed the creation of a logistics minister would be hugely beneficial to the sector.
Should focus shift from greenfield sites to refurbishment of existing sites?
This topic continued the discussion on the perception of the sector and in this case its association with chimney stacks – despite this being in stark contrast with modern industrial and logistics buildings. This perception of course makes it harder to develop greenfield sites. Increased working from home since the pandemic, and neighbourhoods using social media to spread misinformation and negative sentiment about developments have contributed to this.
It was agreed that the opening up of "grey field" sites by the likely next government [this Round Table was before the General Election] would be beneficial. This could be particularly so in the Southeast, where supply is so limited and grey field sites can be found in areas ideal for logistics next to motorways. There was some concern over both a satisfactory definition of grey field and that government and planners will favour housing over logistics. The need for ever more lobbying and profile raising by the sector was apparently to attempt to sidestep these issues. It is hoped use of grey field would be less controversial amongst local communities.
We then moved the discussion on to how the sector sits within the push towards sustainability. How can all stakeholders ensure that developments do not just meet environmental targets but push beyond to set a new standard? This moved the conversation towards the wider energy initiatives that offer exciting new opportunities.
How can green clauses in leases be promoted?
It was acknowledged that there can be a tendency to view green clauses as a "box ticking" exercise. Even when so-called "dark green" clauses are adopted which actually oblige a landlord and tenant to spend time and money on improving environmental performance – they are often then ignored. However, the time where box ticking will be unacceptable is not far off. Pressure is already coming from funders and some buyers and occupiers. This is only going to grow. The sector needs to work on sustainability performance, particularly in relation to older stock.
Where the landlord is able to collect utility data, green clauses could be strengthened with financial penalties. For instance, non-compliance could be factored into dilapidations negotiations.
Interestingly, it was agreed that real compliance with green clauses was far higher amongst smaller occupiers. Larger occupiers, whilst having more resources, have been simply unable to ensure compliance across larger portfolios with differing obligations between landlords.
Can rooftop PV be rentalised?
The discussion moved on to various models for installing and commercialising rooftop solar installations. It was recognised that there is the potential for landlords to install solar (and/or other decarbonisation technologies) with capital expenditure costs recovered over the lease term as a rental uplift or a separate 'solar rent' that is kept distinct for the purposes of rent review. The participants in general felt that this is still not common practice and there is, as yet, no market standard approach. Concerns were raised amongst participants, that if there is a dispute on rent review, the arbitrators may not decide that there is a cost to be passed down to the tenants from the benefit of PVs. It was also noted that the split of responsibilities for the installation, operation and maintenance and impact on the roof are not yet standardised in the market.
Further, several in the room recognised that there is potential for regulatory uncertainty as it is likely that stakeholders on any site will be undertaking regulated activities of generation, distribution and supply of electricity, and that the law in this area is complex. Combined with the other issues discussed, this resulted in a general feeling that while there are increasing levels of deployment of solar rooftop PV, there is a level of transactional risk and uncertainty when deploying such assets.
Several of the attendees commented that in continental Europe, developers are obligated to install PV on rooftops, and that a similar approach would drive the wider roll-out of rooftop solar in the UK, however, rooftop solar is still seen an option rather than a requirement or market standard in the sector. There were also concerns raised that there is not yet a standard approach to valuing the impact of installing rooftop solar assets so the capital and operational c costs are not yet necessarily taken into account from a valuer's perspective. This does not incentivise the installation of rooftop solar PV generation as the capacity and value of electricity generated by such assets is not taken into account as standard when valuing rental levels. Some attendees commented that they are seeing evidence of banks offering better terms for debt financing where the building is built with solid green credentials and that deployment of low carbon generation is a clear positive in this regard. It was also noted that the embedded carbon within the panels themselves and supply chain emissions are not well understood or accounted for, and it is important for the industry to look at the lifecycle carbon emissions of installing rooftop solar assets, including at the end of the asset's lifecycle.
Finally, we looked at the impact of tech, as the UK stands at a tipping point in all areas of the economy with AI. The next few years will be transformed by AI but what further changes are coming and how will this benefit the sector? There is a lot of discussion around the automation of various parts of the supply chain, but can the grid keep up?
What is the impact of automation on the industrial and logistics sector?
Theoretically, there is less requirement for labour but the skill base changes – there is an increased need for higher qualified engineers. Increasingly the technology works alongside employees on the ground to resolve issues, major fixes can be dealt with remotely from a central offsite hub.
Software and installation costs may be higher but savings on labour costs and increasing pace of change is making this more economically viable, especially where the lifetime of the technology mirrors the lease term. As the price of technology comes down the business case for using technology is improving.
Will there be a trend where customers pick up directly from a delivery hub?
Collection sites may be convenient but there are issues with different users – i.e. HGVs for deliveries and general public for collections. This is reflected in restrictions on sales to the public on site.
Automation and technology may reduce the requirement for warehouse space as this is used more efficiently and change the layout to make collection more practicable. These associated efficiencies can also mean that that inventory is not held for as long and goods are out for local delivery more quickly.
Where does the power come from for all this automation and electrification?
It was acknowledged that the increasing electrification of logistics operations and key sectors such as transport places significant additional power demand on sites. This is seen as particularly pertinent to the logistics sector with the increasing pressures at multiple levels to electrify fleets and automate processes. Across the industry it is recognised that in many cases the existing electricity grid connection to a site will not be sufficient to accommodate the effective deployment additional and material electricity demand. The optimal route would be to secure the additional power requirements through additional grid connection capacity, but in the UK securing this grid capacity is challenging due to the oversaturation of the UK's electricity grid, which in many cases is now resulting in unfeasibly high costs or long delays to secure capacity from the grid. This is an issue that many of the attendees had experienced first-hand, and is a frustration across the logistics sector. Where power cannot be se cured from the grid, the deployment of on-site electricity generation and storage assets was recognised as a possibility but the key challenge is that these kind of microgrid solutions may not provide the required electricity profile or energy security at a workable price. Building out a robust electricity grid that is able to meet the demands of the economy was seen as a key national scale challenge for Government and grid companies.
Where a grid connection is available, it was discussed that occupiers with sufficiently large power requirements are increasingly looking to buy part of their power demand from renewable projects with various forms of power purchase agreements available to facilitate the purchase of power from adjacent or remote sites. In general, this approach is not commonly seen in the sector yet, being far more common for large industrial facilities or data centres, however, it is expected to be a growth area for the industry in the future.
