Anju Suneja
Welcome everyone. I am Anju Suneja a Partner in our Real Estate Department and I will be your host for today. Today we are discussing the future of logistics in the continuing wake of the Covid 19 pandemic and Brexit. Both have increased the demand for logistic space, driven in part by immediate food requirements, online retailer requirements and the growth in the 3PR sector. This has had its new challenges and tensions from availability through to mobility. There are successes too and unlike other sectors, 2020 was an outstanding year for UK logistics. The statistics in the property press speak for themselves and highlight that take-up of space was at record levels and there were 165 separate leasing transactions with Amazon taking circa 25% of the space. 2020 also saw the largest UK warehouse investment deal with Blackstone’s acquisition of Polaris’ portfolio for £473 million. Today we’ll discuss some of the immediate and long-term implications and what the future is likely to hold for the logistics market and I’m delighted to be joined by Matt Borelli, Vice-President at PGIM Real Estate; Paul Hanley, a Partner at Bridge Development Partners; Andrea Taverna-Turisan, the CEO of Equites Property Fund; last but by no means least is Eva van der Pluijm-Kok, Director of Research and Strategy at Prologis.
So, I’d like to direct the first question to Eva. So, what in your view are some of the main trends for logistics that have been accelerated by the pandemic?
Eva van der Pluijm-Kok
I think the very obvious, very obvious to everyone in the audience because they’re experiencing it on a daily basis is you know, the acceleration of the e-commerce revolution. I think what’s very important to realise with that is that it’s not just about you shopping one time online just because you cannot shop in streets but it’s about those new adopters. Like, my parents shopping for groceries online and now having subscriptions you know, like constantly shopping online. And a second trend I think that’s pretty significant is inventory levels, level rise. So, something that we saw with some of our customers already pre-pandemic is that there was a move from just in time to just in case. So, we’ve seen that and we expect that about a 5-10% rise in inventories is pretty reasonable in the next coming years.
Anju Suneja
Paul, what are your views?
Paul Hanley
Yeah, I very much agree with Eva. If you think about it in this context circa 30% of all retail now that happens within the UK is done online. Retailers and e-commerce and parcel delivery companies were saying throughout the pan you know, the start of the pandemic it was essentially like trying to deliver Christmas day, every day. That feeds through very clearly into needing additional capacity and you know also to service last mile to you know, add in sort of yeah, additional space into, into your last mile strategy as well.
Anju Suneja
But also coupled with that though is the scarcity of land so, how are developers going to deliver last mile logistics?
Paul Hanley
Yeah delivering any product when you know when there’s a scarcity of the raw material that you need to create it is tough whether that’s real estate or anything else. It is a challenge in order to find land in a sort of relatively land-staffed market particularly around Greater London. You need to be on the front foot, you need to be proactive and you need to chase the opportunities rather than waiting for them to come to you. I think also just repurposing. There’s a lot of industrial stock within Greater London, within areas that are protected for that use class within SIL designated areas and you know focusing on those types of buildings that may be sort of 30/40 years old you know less functionality you know, tighter yards, lower clear heights things like that. Looking at those assets and ways in which they can be you know repurposed or redeveloped or intensified in terms of the use, those are where the opportunities I think in the main are going to come from.
Anju Suneja
And so, Matt, from a sort of lending perspective what are your views on last mile and in terms of the growth of that area and sort of are you focusing on that area or are you looking at the sector as a whole?
Matt Borelli
Yeah we’re extremely bullish on last mile and I think in particular around London. You know there’s continued destruct… you know you have more destruction of property through it being demolished for you know, housing uses than you often have with deliveries. So, the supply demand dynamics I think are going to continue to be extremely favourable as we move forward for last mile and I think yeah, we’ll continue to be investing in that space.
Anju Suneja
And Andrea, obviously you’re working in two different markets here and so in terms of last mile and your views it would just be quite good to understand the sort of difference in terms of the two markets.
Andrea Taverna-Turisan
The e-commerce platforms in South Africa haven’t reached a level where real estate decisions are made based on e-commerce so, e-commerce is still an appendage. You tend to have a big box and e-commerce would be operated out of that. I mean, the one element that I think is also quite important and I think is going to come to bear especially in a city like London is all the sustainability stuff. So, you know with good old Mr Johnson sort of announcing that combustion engines will be banned in the UK by 2030, the consequence of that is all of a sudden now, energy becomes massive and, and docking stations to charge you know potentially 100, 200 in some instances 400, 500, 600, 700 vehicles that need to be charged.
Anju Suneja
There was a report that came out in 2018 that said that goods delivery may cause or be responsible for up to 30% of CO2 emissions in the cities. I mean, what is the industry doing about this?
Eva van der Pluijm-Kok
So, we recently did a study together with MIT who for us is a long-standing partner because we really wanted to understand what is the impact of e-commerce in terms of emissions versus normal brick and mortar shopping, in-store shopping. The study was really interesting because it showed that actually e-commerce has 36% less emissions than in-store shopping and I think you know like that percentage for me was even quite surprising that it was so much.
Anju Suneja
And Matt from sort of a lending perspective, how closely do you scrutinise these issues in terms of when you’re lending as well? Because obviously as Paul said it’s a big part to play in the property industry now.
Matt Borelli
Due to the nature of this capital we’ve always tended to try to back best-in-class sponsors. ESG has always been kind of a natural part of that process and I think the big shift that’s happening at the moment is that that approach is no longer enough. Really, what we’re trying to roll out over the next couple of months is really scoring all of our transactions you know and ESG-resilience basis. And something which can not only be scored when you, you know, enter into that transaction but something that can actually be monitored on an ongoing basis. And the question’s going to be when those scores start coming back and we start monitoring those, is it going to tell us what we already believe about the portfolio or is it going to say, ‘No, you actually have to kind of change the way you’re thinking about it.’?
Anju Suneja
And Paul, as a sort of new entrant into the UK market, what factors are you sort of considering when you’re looking at new investments?
Paul Hanley
I think ultimately some of these are being dictated by planning and through the entitlement process. So, perhaps in terms of public transport and accessibility and things like that. Others will be incumbent on the developer in terms of the specification. You know certainly we’re looking to make improvements there. A lot of the things that we can do to the building that’ll benefit the you know, the environmental impact they have.
Anju Suneja
I just wanted to have the panel’s thoughts on where we see you know, what new development schemes and what are they going to look like? You know, beds and sheds and Paul mentioned the conversion of sort of retail warehousing for logistics and just where do we see those themes and trends?
Andrea Taverna-Turisan
The themes are obviously always go back to the same thing. It’s the scarcity of land. It’s, it’s, it’s… as Eva said earlier it’s actually educating the town planners at municipal level to buy into an idea and obviously you need the client also that needs to buy in and sometimes you know, is going to end up paying a lot more for schemes as they, as they come forward.
Anju Suneja
And Paul?
Paul Hanley
The over-arching theme is one of intensification. So, even if you’re looking at a single-storey warehouse now, I think improving clear height just so that building can be intensified. I think over and above that the obvious would be multi-storey warehousing which is still very much within its infancy. Conversion of retail warehousing is something else. I think that subterranean is something that keeps coming up as well more and more. Yeah I think that’s tough and from a sort of wellness perspective it’s difficult to put people in buildings with no natural light. But I think you know, there’s a lot of different themes but as I say, intensification is probably the over-arching one.
Anju Suneja
I agree and I’m particularly interested in subterranean but I think the whole point about wellness and the employee wellbeing is obviously very important. And actually I do want to mention that because particularly in other sectors, in the office sector there’s a huge drive towards wellness and say, Andrea for example, in terms of what you’re doing and how you’re satisfying consumer demands in terms of what your tenants are looking for?
Andrea Taverna-Turisan
Obviously, the digitisation of warehouses and, and the amount of technology that’s going into some of them. I mean some of the warehouses we’re involved in at the moment are going to be predominantly mechanised and with very few people in them. So, the essence of wellbeing becomes obviously a little bit less important.
Eva van der Pluijm-Kok
The fact that automation is rising in buildings, it’s not necessarily that we see a lot of automation coming in but you know definitely partial automation and that means that you have to attract high-skilled labour that is used to working in offices. These are people that you know, don’t want to work under the shoddy circumstances that are sometimes found in warehouses and it’s actually one of the things that a lot of our customers have struggled with is actually attracting skilled labour.
Andrea Taverna-Turisan
We, for instance in our, for a completely mechanised warehouse that we have in South Africa, the engineers that run it are basically all live in Germany. So, whilst I do agree with you that the skill level of people coming into these facilities is significantly higher than just the basic warehouse, it doesn’t mean that those guys have to be physically onsite.
Matt Borelli
To some extent it’s replicating what you’ve seen happen in a lot of the offices over the past decade. So, in a lot of the warehouses – in some of the warehouses with – some of the tenants are further along in this. You know, you see pretty nice canteens you know with different things to do, you see gyms, obviously, natural light’s been mentioned so, I think we’re just going to continue to kind of move in that direction.
Anju Suneja
I’m going to bring in a question from the panel. How quickly will the market take on pilotless drones?
Paul Hanley
It just feels difficult doesn’t it? I think is the reality. I mean, it sort of makes sense but I think that there will be a lot of kind of jurisdictional issues and health and safety issues and things like that.
Anju Suneja
Where do we see the technology going and what other you know technologies are we seeing in new-build developments in the logistics market?
Eva van der Pluijm-Kok
Like, automation is definitely accelerating. It’s been pretty low for a long time. I mean automation is not per se something new. I think the fact that technology has advanced and it’s become more affordable to implement has really accelerated that adoption. I think what we’re also really seeing is bigger focus on data and how to capture data and actually how to improve your supply chain efficiency and how to capitalise as much as you can on that data that’s available in your warehouse.
Anju Suneja
No panel discussion is complete without mentioning Brexit. So, I do want your views on how we think Brexit will impact the sector if at all?
Matt Borelli
I think though you know the case for the positive impact that I’ve heard and which I think will probably hold true is I just think companies will likely hold more inventory which will result in a greater requirement for warehouse space.
Anju Suneja
And Andrea, sorry obviously investing into the UK?
Andrea Taverna-Turisan
Ultimately our view on it I mean the UK market is generally a consumption-led market. In a nutshell you know Brexit if anything the one benefit it will bring is inventory levels will go up for us because there may be a few you know, border-crossing problems. But in time they will settle. The new normal will be found and life will go on.
Anju Suneja
I think I would like to and I think everyone would like to hear what are the panellists views on the market in 2021 and beyond and where do we see the market going? Just in terms of pricing and general appetite for the market.
Paul Hanley
The appetite at the moment is incredibly significant and I can’t remember a time in my career where it’s been like this and we’ve said that every year for the last sort of seven years and then every year it, it increases. And you know, the appetite is so strong because you’re seeing investors for the you know some investors for the very first time who are trying to invest in logistics now and balance the portfolio. There are plenty who have been very long in office, retail and other sectors that are looking at this for the first time. You know, we live on an Island. There’s limited land. There’s limited supply. There’s limited product. So, it’s going to continue to be competitive.
Anju Suneja
I’m just going to ask one more question and I’d like each panellist to answer in sort of very brief one or two words. And so I just wanted to know what are the biggest challenges for the sector going forward?
Paul Hanley
The planning system.
Andrea Taverna-Turisan
Yeah. I think planning too for us. I mean, we decided to go up the food chain and get involved with a developer and, and… but going up that food chain we are seeing those planning issues and it is sometimes, yeah, it is sometimes very nail-biting shall we say?
Matt Borelli
I’ll go with the labour which we’ve kind of touched on before. Keeping an eye on that especially you know in light of Brexit. You know will cost-efficient labour continue to be you know available for all of the warehouses and if not there’s gonna be an impact on costs and that’ll flow through the system.
Eva van der Pluijm-Kok
I would say it’s scarcity in three ways. It’s scarcity of land. It’s scarcity of labour. And scarcity of viable investment opportunities. So, I think that’s really the three challenges.
Anju Suneja
I think that’s a, a very good place to finish this session. I’d like to thank our brilliant panellists Matt, Andrea, Eva and Paul and also thank you very much to our audience. Thank you.
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