Navigating rising demand: perspectives on investing into the logistics sector

27 August 2024

The UK’s newly elected Labour government has vowed to build 1.5m homes over the next five years, speed up planning and make more development land available through a change in land designations. More houses will mean more logistics demand, which is potentially excellent news for the industrial and logistics sector.

Last year, the industrial and logistics leasing market returned to typical pre-Covid levels, according to Savills data. Although coming off the exceptional market highs during the pandemic, when online shopping and demand for deliveries soared, this has felt like a jolt.

Post-pandemic inflation rises, geopolitical instability and economic uncertainty have also dampened development activity in the last year or so.

“The fundamentals and occupier demand in the sector are strong. Development-wise, we have seen a resurgence of occupiers looking at build-to-suit largely because of the lack of speculative development. However, with a bit more geopolitical stability now and more clarity around interest rates and funding, that's all going to help drive appetite for more speculative development again,” says Dwynwen Lewis, Partner, Trowers & Hamlins.

More housing = more logistics demand

The government’s house building plans could also drive logistics occupier demand.

Back in 2019, the British Property Federation highlighted the connection between housing and logistics space in its ‘What Warehousing Where’ report, based on the then-Conservative government’s house-building targets:

“There is presently 69 sq ft of warehouse floorspace for every home in England. If this relationship were to continue this would mean 21 million sq ft of additional warehouse floorspace is required each year to match the government’s annual target of 300,000 new homes.”

That housing target was never met, and since 2019, the pandemic has accelerated the growth of online commerce, so the floorspace requirement per home may be different now. Regardless of the exact number, new homes need amenities and supporting facilities, including logistics.

To deliver on its building for economic growth strategy, the government also wants to speed up planning.

There is little detail yet on what its planning reforms will look like other than a focus on all development, not just housing.

A problem logistics developers have faced with planning is the perception among officials making decisions that the industry generates mostly low-skilled jobs when, in reality, it is increasingly high-tech and generates high-skilled jobs.

“One of the biggest employment gaps in the logistics sector is in coding,” says Lewis.

The BPF is among the industry campaigners looking to change opinion about the sector, highlighting its economic importance. An industrial unit that delivers good, high-paying jobs is likely more appealing to local politicians when considering planning applications.

Another challenge those in the sector are addressing is finding suitable development sites.

Big distribution warehouses need large tracts of land with good road infrastructure offering regional and national connectivity. Last-mile delivery, where goods are transferred from HGVs to vans for the final leg of the journey, needs to take place in urban areas.

Given the type of traffic logistics generates and the imposing look of buildings, as a use-class it doesn’t necessarily sit comfortably alongside housing.

Making the most of development land

Developers are looking at innovative ways to make the most of space and locations.

“Japan sets a really good precedent for how you can build dense distribution development well,” says Lewis. “Whether that is a multi-storey unit or co-location, where units neighbour residential land, these are problems that are being solved. The 'beds and sheds' model in London is particularly attractive because of its potential to boost housing supply whilst maximising both employment and logistics space.”

For last-mile logistics, the Government redesignation of land suitable for development may also be good news.

Greenfield land designation was set up to stop urban sprawl, but there are pieces of low-quality land, which are currently protected, that Labour wants redesignating for development. These sites tend to be at the edge of urban areas, which are prime locations for last-mile logistics.

The demand for last-mile logistics is such that there is competition for suitable sites and space. This is reflected in both logistics investment and rental values.

From an aesthetic point of view, logistics may not be the most attractive of the real estate sectors, but one major advantage it has over other sectors, such as offices, retail, or housing, is the speed of delivery. Distribution units are comparatively simple to develop.

“From the point of opening a fund, going through planning, building, letting and selling on, it can be as little as three years. You can put money in and get money out quickly,” says Sam Folley, Partner, Trowers & Hamlins.

Sustainability considerations and opportunities

Like other sectors, logistics space has seen a flight to quality with occupiers looking for buildings with good sustainability credentials. This focus is driving rents and returns on greener buildings.

Future-proofing existing and new development is also an important consideration for developers and asset managers. Minimum energy efficiency standards and sustainability criteria will only become more stringent as the UK moves closer to its net zero carbon target.

“It’s an important consideration to avoid the potential of stranded assets in the future,” says Nick Green, Partner, Trowers & Hamlins.

However, sustainable development and retrofit aren’t new to the industry, and the knowledge and skills to deliver greener assets are already established.

As a high-tech industry, logistics is power-hungry, and sourcing sufficient power can be a challenge.

Industrial units with large flat roofs lend themselves well to solar panels, and the new government has renewed its focus on clean energy generation and power infrastructure.

“We are seeing innovation and collaboration in this area, too, with developers often using independent distribution network operators for their power, as well as collaboration between those IDNOs, the grid and transmission operators,” says Lewis.

Logistics vs offices

While the trend has been for more build-to-suit logistics development, the appetite from occupiers is such that speculative development now has a comparatively lower risk profile than developing offices where it is harder to find tenants.

“Logistics occupiers will generally take longer leases of 10, 15 or even 20 years,” says Folley. This makes them ideal investment opportunities and attractive for bank financing too.

The I&L market retains both good fundamentals and opportunities, and from the conversations we are having here at Trowers & Hamlins and with our clients, we see plenty of appetite from experienced UK-based investors and developers looking for international joint venture funding partners.