Only a few weeks ago – but it feels like years ago – the leaders of the UK logistics and distribution sector were struggling to get the attention of ministers. SHD Logistics reported how they feared the budget, then in preparation, would penalise warehouses and put supply chain businesses, already operating on wafer-thin margins, in even deeper peril. Today couldn’t be more different. Suddenly everyone knows, with the clarity that only a really serious crisis can provide, how much we depend on the supply chain.
Simultaneously, demand for warehousing is manifestly strong at a time when measurable interest in every other sector of the property market – shops, offices, leisure – has taken a nose-dive.
So, does this bode-well for the logistics sector, and warehouse property, in the post-pandemic world? According to those with serious money in the game, the answer is a modest ‘yes.’ According to those who advise the people will serious money in the game, and potential tenants, the answer is a firmer ‘YES.’
IN THE MONEY
Let’s start with the money. Aviva, the general insurer, is literally made out of the stuff. Their asset management side, Aviva Investors, is a big name in the UK office market and a rather less big name in industrial/warehouse property, but still a significant player. In December Aviva Investors completed a £83.15 million deal to refinance a portfolio of regional logistics assets on behalf of Aviva UK Life’s annuity business. The portfolio includes assets in Thatcham, Glasgow and Basildon. Chris Urwin is Aviva Investor’s director of research for real assets (property to you and me). His analysis is that the coronavirus-related economic shock will accelerate existing trends in the retail and logistics sectors.
“ Cyclical downturns can also accelerate structural changes. This raises concerns about discretionary retail, one of the first sectors to be hit by COVID-19,” he says. The first symptoms will be retailer’s reluctance (or inability) to pay rent. The March quarter day revealed this was already happening on a grand scale with shopping centre landlords intu and Hammerson collecting barely one-third of the rent due making Capital & Regional look staggeringly successful by collecting a full half of the rent due on their shops. For comparison, the normal payment rate is well over 90%.
However, not all bricks-and-mortar retail is suffering: Non-discretionary retailers such as grocers and pharmacies are doing okay. “A larger percentage of the population could become dependent on e-commerce during the period of enforced social isolation,” Urwin concludes.
This isn’t good news for everyone, he says. “In the logistics sector, fortunes will likely vary. Occupiers will be impacted by the disruption to global supply chains and potential labour shortages, and in-store retailing may reduce demand. However, a larger percentage of the population could become dependent on e-commerce during the period of enforced social isolation, providing some support for the sector. On balance, assets in proximity to consumers and, particularly, labour are likely to be more resilient,” Urwin says.
At this stage data to support this kind of confidence is hard to come by: Aviva point to research by Greenstreet Advisors showing that the big property investors in industrial property have taken a much less severe hit to their market valuations than those with office or, worst of all, retail portfolios. But it is still early days.
LIGHT AT THE END OF THE TUNNEL
The ‘on the one hand and on the other’ approach of the big investors becomes something much more certain and red blooded in the hands of the UK’s leading property consultancies. Their view is, almost unanimously, that logistics property is going to come out of the coronavirus pandemic a winner. Colliers International say a spike in demand for warehousing will turn into a medium-term pause in development ending in a longer-term rebound.
In the first weeks of the pandemic in the UK, food production rocketed up by 50%, due to panic buying and, as a result, has unleashed an uptick in flexible requirements for industrial and logistics floorspace. “Amazon, Ocado and all the major UK supermarkets are implementing their contingency plans, and some are in need of urgent flexible or short term space,” Colliers’ head of industrial and logistics Len Rosso says.
Colliers expects investors and developers to slowdown, if not pause, their development pipeline programme to de-risk their financial exposure while working more closely together with their occupier base to find mutually beneficial solutions. Little rental growth is expected, whilst rent-free periods and other incentives will become more generous as the UK (and world) economy weather’s the economic storm that will come in the wake of the coronavirus lockdowns. Good modern warehouses of recent vintage will see less slippage in rents, and less generous incentives. Colliers' prediction is that the sector will rapidly bounce back.
“We are dealing with an unprecedented challenge, but this will also create opportunities for savvy investors,” says Rosso. “The industrial and logistics sector is better-placed than some other real estate sectors such as leisure and retail to weather this storm as all age cohorts will increasingly adjust to shopping online.” The suggestion that the coronavirus crisis will accelerate changes already well-underway is seconded by consultant Lambert Smith Hampton. LSH estimate that in the short-term the pandemic could mean an additional 5 million sq ft of logistics requirements in the UK. Longer term demand will depend how seriously the UK economy has been damaged by the government’s decision to put practically all business activity into a coma.
“It is clear that the near-term impact will be huge. Many countries, including the UK, are at immediate risk of entering deep recessions,” LSH head of research Oliver du Sautoy says.
“Optimists will be hoping for a ‘v-shaped’ recession; essentially a short, sharp shock in H1 followed by a strong recovery in the second half of the year. While Covid-19 could have profound impacts that are felt well into H2, an economic recovery of some kind is likely to have begun by 2021.”
This echoes warnings from economists within and without the property business. Cushman & Wakefield’s chief economist, Kevin Thorpe, is among those suggesting a very sharp recession this year which might bounce some of the way back up by the winter. “Nobody can model this and say how it will play out, the range of forecasts are all over the map,” Thorpe told a hastily-arranged webinar for Cushwake’s global client list. Thorpe says that the recession that comes will probably not be long and deep like that from 2008-2012, nor short and shallow like that after the dotcom bust of 2001. Instead it will be short and sharp.
“Economic data for Q2 2020 will be brutal. Even with all the fiscal and monetary stimulus, that is 8-10% decline in GDP in one quarter, and you could very easily make that 20%, which would be the largest on record. But Oxford Economics have predicted growth in Q4 of 14%, so it could be a very v-shaped recession,” he says, adding. “But of course a lot has to go right for the economy to follow that script,” meaning the virus has to be beaten.
Thorpe suggests that if there are short-term winners from all this, it will be the logistics sector with demand for warehouses holding up. Then along comes the sharp v-shaped recession and the hope is that the online habit shopping will mean continued demand for floorspace sufficiently to balance the reduced demand from retailers (and manufacturers) who will go to the wall.
This diagnosis is shared by some of the large developers. The pandemic has starkly revealed the importance of the supply chain, and the surge of investment into warehousing is likely to grow once normal life resumes, according to analysis by US logistics property giant Prologis. In the meantime they warn of turbulence.
Du Sautoy adds the warning – chilling in the context – that Brexit has not gone away, and nobody can quite know what effect that will have if the government proceeds as it has done so far.
None of this could be called positive in the context of a crisis threatening so many lives. It scarcely counts as encouraging. But it does suggest that, when life returns to something like normal, logistics in general, and logistics property in particular, will be less badly placed than they might have been.