The biggest clue probably came the day after Chancellor Rishi Sunak’s budget, when Housing and Local Government Minister Robert Jenrick announced changes to the town planning regime. At first blush they do not seem to offer much for logistics property.
Yes, the government will launch a register of brownfield sites, which will map out unused land as part of plans to encourage councils to make the most of this land before building on greenbelt. But the £400 million made available to bring brownfield land into use is unlikely to go very far, and priority will in any case go to housing. Yes, the government plan to rethink compulsory purchase powers to make land assembly easier, potentially useful for large logistics sites.
But there is no comfort in the announcements that developers will be able use a fast-track process to demolish vacant commercial, industrial and replace them with new homes. The logistics sector is already suffering because potential warehouse and industrial land is being consumed by residential development, and to lose existing sites without proper planning control is hardly going to help.
Early responses from property sources suggest weariness and lack of enthusiasm. “It seems planning rules change nearly as often as Housing ministers,” says Hew Edgar at the Royal Institution of Chartered Surveyors.
“It’s bizarre, given their net-zero commitment, that the Government is proposing to make it easier to demolish existing buildings – rather than retrofitting them with the latest technology – it isn’t green or sustainable for our planet and something ministers have been repeatedly told.”
Private sector consultants sound equally frustrated. Bidwells, who operate predominantly in the east of England, pointed out that since 2010 the amount spent employing town planners had fallen by 55%, whilst planning targets have grown 50%. The implication is that more money to allow planners to cope with new applications might be the most useful step the government could take.
A full planning white paper is due in the spring. The budget itself, with its promise of £600 billion of new infrastructure spending, won some praise, but also left some big worries unaddressed. Some tinkering with business rates came with the rider than a root-and-branch review of the business rates system would soon follow. The concern among many in the logistics property world is that business rates could be a cheap and easy way for the government to skim some tax revenue off the online retail sector – and this is not an approach they welcome.
The need for investment
Greg Cooper is UK director of industrial and logistics property for US investor Hines. “A commitment to significant transport infrastructure spending may open up opportunities for us at new logistics nodes, although perhaps they will be in more peripheral locations, and of course these projects take years to complete so we simply don’t know when or if we’ll see the benefits,” Cooper told SHD Logistics.
“But I would very much like to hear more about business rates reform. This is obviously an issue for high street retailers, but I would dread to see some kind of levelling up which might penalise online retailers, perhaps via empty property rates or more occupational costs.”
Specialist consultants take a similar view, and also emphasise the need for the government to invest in education and training, as much as in infrastructure, if the logistics sector is to thrive.
“Most logistics businesses depend on retail, so easing of business rates for retailers is a significant step. And investment in infrastructure is welcome, but personally I’d like to see more spent on learning and development in vocations like logistics and construction, because for many operators labour issues are the real headache,” says Cushman & Wakefield logistics property partner Tim Crighton.
“It’s all well and good to have a logistics site available, but occupiers of that site will want to know where their staff are coming from.”
Back to Brexit
Of course, there are Brexit concerns about the Boris Johnson government, many of which add an extra layer of complexity to a logistics sector already operating on knife-edge profits. The most conspicuous is the possibility that the Government will not seek an exemption on safety and security paperwork for cross-border trade with the EU. The Swiss, also outside the EU, have such an exemption and if plans from HMRC’s Brexit Delivery Group turn into reality, it could massively increase the burden (and cost) of red tape. Logistics and freight trade groups have already started ringing alarm bells.
But these are, perhaps, temporary disturbances. Looking longer-term at the Boris Johnson government, what could the next four or five years bring for the logistics property sector? The answers may surprise you.
Predictions for the future
David Binks is the senior director for leasing at Midlands-based logistics developer St Modwen, and one of the most thoughtful figures in the warehouse property world. He has three predictions.
First, there is a widespread expectation that the days of the simple big box warehouse are probably over. By 2024-2025 something much more hybrid, bespoke and complicated will have taken its place.
Second, logistics landlords will become multi-purpose service providers for the logistics sector, and this will include acting as their friend in the local labour market. It would be an exaggeration to say landlords will become employment agencies, but they will certainly be playing a prominent role in recruitment.
Third, the push to reduce carbon consumption will transform the way logistics property works.
Flexibility is key
The first prediction, the end of the simple big box warehouse, seems the most radical but is already underway, Binks explains.
“Investors and the people who put up the finance for logistics development are already insisting on better sustainability, which means a longer life for their buildings. Occupiers are also demanding this, and developers are responding to both by extending the lifespan of buildings, increasing the flexibility of use, and the materials they use,” says Binks.
“We’re going to see floorspace that could be used for manufacturing or 3D printing as much as for distribution, and we’ll see less traditional racking because even the floorspace that remains for warehousing will be changed by artificial intelligence and automation. So, we’ll see our buildings doing a lot of different things, and developers will anticipate those needs by creating buildings with more flexibility.”
This means more natural light, more height, more electrical power, more (or perhaps fewer) doors, more (or perhaps less) yard space, and a host of other tweaks that will make the standard big box seem remarkably simple. “Flexibility will be the key to floorspace. This is already happening now, but by 2025 the trend will be well underway,” says Binks.
Power in people
The second trend, the transformation of landlords into quasi-employment agencies, is also visible today albeit in a small way. “Landlords know that the logistics sector is focused on where it is going to get its staff, and what skills those staff have. That is what is keeping occupiers awake at night when they look at a new building, not the geography, because they take it for granted that the building is in a good location. So developers like St Modwen are now supporting local labour force initiatives, working with local councils on skills and training, and finding ways to help the local labour force secure jobs,” says Binks.
“The old adage was that property was location, location, location. Now its local, people and power.”
St Modwen has put its money where its mouth is and is committing 1% annually of cash profits to education and training.
A green last mile
Behind it all stands the third change that will be prominent by the end of the first Boris Johnson government: climate change.
“In the short term this will mean modifications to diesel vehicles until alternative technologies become available, and we’ll see changes which mean less travelling, so more local manufacturing and 3D printing so goods have to travel shorter distances to market. But it is not possible to escape the fact that transport will have to go electric. Some operators are already changing their fleets,” says Binks.
There will be consequences for the property market, as investors begin to distinguish between buildings that are capable of coping with net zero carbon requirements, and those that pose greater problems.
“We’ll probably see a two-tier funding market, which means investors create different yield profiles for the more flexible buildings. In the short-term we may see investors drive yields for the flexible buildings, and rather less enthusiasm for the others,” says Binks.
St Modwen aims to be operationally net zero carbon by 2025 and fully net zero by 2040.
Do other property players agree with Binks? On the whole, yes. Johnny Hawkins is a logistics property investment specialist at surveyors Knight Frank.
“I agree that the biggest changes will be bans on diesel vehicles, an extension of the controls we’re already seeing imposed by the big cities like Birmingham, Bristol and Manchester. We’re going to see more electric vehicles in urban areas, and more near urban logistics sites,” says Hawkins.
“Yields for investors in logistics property will probably stay flat overall, but that depends on a lot of factors including no global shocks to the economy, and no inflation."
Hines’ Greg Cooper says none of this spells the end of big box warehousing – but it does mean a more complicated market for logistics property.
“We are still going to need large national fulfilment centres because their scale makes them efficient, and also makes them more suitable for automation. But whilst big box warehousing will not vanish, the way goods get to them, and from them to shops or customers, will change,” says Cooper. “That may mean electric vehicles, platooning of HGVs, more and better predictive analysis of customer needs so goods can be moved more efficiently, but not an end to big box warehousing."