There is a strong story to tell in the logistics and warehousing sector, which is likely to be an area of significant growth and development all over the globe in the years ahead, particularly in the UK and Europe. 

E-commerce sales growth in Europe has been led by the UK, followed by the Netherlands, Czech Republic, Ireland and Poland. Investors now expect to see major e-commerce expansion in the coming years in Germany, Spain and France, as these countries see online sales capacity grow from a low base.

The Covid-19 pandemic gave e-commerce an artificial boost and although e-commerce spending has since dropped back to a more typical level, the growth rate is expected to remain significant. This means physical shops will continue to lose out to warehouses and the fleets of lorries and vans required as retailers deliver goods across the country to their customers’ doors. Smaller and more frequent purchases increase both the number of times goods are moved and the warehouse capacity required to process it all.

To sell the same amount of goods online as in-store, you need an estimated three times more logistics space. It’s not only about more floorspace; the capacity needs to be in different locations too, as an e-commerce-based retail platform needs a combination of big boxes, where bulk goods are stored, and local ‘last-mile’ urban logistics facilities. where goods are broken down, processed and shipped to the customer.

Urban logistics units are the newest part of the supply chain but are critical components. The higher prevalence of returns and the challenges of distributing to a fragmented customer base can only be efficiently serviced from bespoke warehousing. The warehousing space needs to be able to house specialist automated technology and cross docking functionality, to allow the rapid movement of goods to support ‘instant delivery’ aims.

Ideal locations are typically on the fringes of urban areas where efficiency is maximised, labour is available, and costs are kept to a minimum. Not surprisingly, demand for space like this is only increasing and vacancy rates across Europe are at historical lows. It’s likely that governments will have to intervene to ensure that cities get the logistics infrastructure they need without negative effects on the environment or employee working conditions.

The UK has been one of the fastest adopters of e-commerce for several reasons, including the rapid growth of Amazon. The smaller landmass of the UK and the number of densely populated areas mean Amazon has been able to create short delivery timescales and has taken more market share. In Europe, the expansion of Amazon has generally been slower, apart from in Germany. Spanish company, Il Corte Ingles, is one of many European businesses aiming to compete with Amazon domestically by improving its online sales capability and its supply-chain efficiency.

Distance and greater landmass can be a barrier in Europe, but as most e-commerce is centred around urban areas, more available land can make it easier for e-commerce companies to find sites. Cultural shopping habits, particularly around grocery shopping, and a lower appetite for fast fashion are perhaps greater barriers to e-commerce growth in some countries.

The demand for warehousing and logistics support is not just about e-commerce but is also driven by de-globalisation and the need for more local supply chains. ‘Friend shoring’ and ‘near shoring’ are terms we now hear, as countries consider their energy security, battery production and domestic supply chain networks, to reduce over-reliance on other countries. The growth of warehousing on the Mexico-US border is a good example of the US wanting to bring manufacture and supply closer to home. Real estate broker CBRE estimates that 40% of logistics leasing in Mexico was driven by near-shoring demand in 2022. The pandemic has changed supply chains from ‘just in time’ to ‘just in case’, plus long supply chains bring added risk and costs.

As investors in the warehousing and logistics sector, we aim to buy, or create, best-in-class assets with sound long-term prospects. Strong ESG credentials form an increasingly normal requirement for tenants and landlords. Yet most existing stock in Europe is over ten years old and not compliant with modern ESG standards. Landlords can dramatically improve their Energy Performance Certification (EPCs) by replacing gas heating with electric or geothermal heat and by installing photovoltaic cells on warehouses, though older properties are typically harder to modify. Landlords will need to adapt to these requirements and investors must be aware of them for existing assets and potential acquisitions.

The legislation is evolving quickly, and companies will be forced to adopt standards on emissions and employee welfare conditions. Operators should think ahead to ensure they are not regulated out of the very areas which also constitute the optimal location for their infrastructure.

During recent years, supply chains and infrastructure to service e-commerce have had to evolve at breakneck speed. It will likely take another decade or so before supply chains begin to meet modern demands. But we certainly see this as a major and ongoing trend that will not diminish now that the pandemic period is over.

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Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.

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