European logistics: surveying the digital evolution

Craig Wright, Head of European Real Estate Investment Research,
Aberdeen Standard Investments

  • As the growth of ecommerce has surged in recent years, the demand for logistics space has soared.
  • But the sector is also facing unprecedented disruption as technology evolves rapidly, as city populations grow, and as environmental and governance issues gain importance.
  • Logistics companies are under particular pressure to adapt quickly because their businesses are anchored to rigid bricks and mortar supply chain networks.
  • As one of Europe’s largest real estate investors, it is critical for us to understand what challenges our tenants are facing.

Aberdeen Standard Investments conducted a second annual survey at the start of 2020, in partnership with Transport Intelligence. We explored the latest trends in the sector and gained insight into how logistics companies are changing to meet the increasing demand from the industry and from consumers. The survey received 123 responses across 24 countries. There was a broad range of respondent types, including logistics operators, manufacturers, ecommerce providers, retailers and parcel couriers. There was also a mix of owner-occupied and leased properties.

The full results of the survey can be found here.

The findings from the survey revealed that, as expected, the logistics industry is growing strongly. Around 77% of respondents said that their business activity had grown either modestly or substantially in 2019. As a result, respondents declared a growing shortage of existing capacity to service more contracts. The availability of new premises in order to allow expansion is also a growing problem. Around 38% of respondents said that a lack of available property constrained their business ambitions. We estimate that the vacancy rate for the European logistics market is below 5%, on average. In many areas, the only source of good-quality space is through development.

Structural changes with regards to the environment and governance are also affecting the supply chain infrastructure in new ways. These demands are reshaping the requirements for logistics companies, while placing a greater focus on the environment and employee welfare. Around 76% of respondents confirmed that their businesses are already undertaking initiatives to reduce environmental effects. This is an increase from 70% in the 2018 survey. Occupiers are demanding more engagement from landlords on this matter – particularly in terms of supplying alternative energy supplies, such as LED lighting, solar panels and electric charging points for cars.

Similarly, the ‘gig economy’ and zero-hour contracts have ignited a debate about employee welfare. The activities of a warehouse can create dangerous environments, which mean that logistics tenants face tighter legislation and more media scrutiny than other businesses. Amazon, for example, has been criticised by the UK media for allegedly failing to recognise the effects of working conditions on employee welfare. It is unsurprising, then, that 65% of our respondents said that their businesses had implemented initiatives to improve conditions for staff. Labour shortages are significant in the industry, particularly truck drivers, and it is important for companies to take employee welfare seriously if they want to remain operational.

Meanwhile, digitalisation has replaced physical technologies as the focus of business investment. The move into data analytics, artificial intelligence, blockchain and the ‘internet of things’ is driven by growing demand from customers for speedy delivery and transparency in the age of ‘instant’ delivery. In terms of warehouse requirements, 80% of respondents said that automated technology had become increasingly important, as manual labour is becoming more expensive and scarce. The 2019 survey also shows that, while technology is the major disruptor to the industry, it is also the solution. There is a growing emphasis on robotics and finding efficiencies in the supply chain through data analytics and digitalisation.

The survey also demonstrated that the demand for logistics real estate will continue to be in urban fringe locations, given the acute pressures from ecommerce. Companies need to be located close to major population centres in order to deliver quickly and to have access to large pools of delivery staff. This will increase the pressures on regulators to support the balance of economic infrastructure and human welfare in urban areas. If operators are not thinking ahead, they could be regulated out of sensitive areas, despite this often being the optimal location for their infrastructure.

The latest survey made it clear that logistics operators are under intense pressure to adapt. Changing demands from globalisation, urbanisation, consumption patterns and the growing constraints of environmental and social legislation all require their attention. The challenge for landlords is that the rigid nature of physical real estate is part of the mismatch between the need for supply chains to adapt and their inability to do so.

To mitigate any loss of income, landlords need to engage with tenants throughout the duration of their lease agreement to ensure the facilities are meeting tenants’ requirements. And tenants need to identify any complications arising from changes to their business model as early as possible. In a world where real estate is becoming more operational and where cashflows are less certain, landlords should treat tenants as partners to prevent downside risks from emerging.

Important information

Risk factors you should consider prior to investing:

  • The value of investments and the income from them can go down as well as up and you may get back less than the amount invested.
  • Past performance is not a guide to future results.
  • Investment companies are specialised investments and may not be appropriate for all investors.
  • Investment companies can borrow money in order to enhance investment returns. This is known as ‘gearing’ or ‘leverage’. However, the use of gearing can result in share prices being more volatile and subject to sudden or large falls in value. Where permitted an investment company may invest in other investment companies that utilise gearing which will exaggerate market movements, both up and down.
  • There is no guarantee that the market price of the Company’s shares will fully reflect its underlying Net Asset Value.
  • As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
  • Investing globally can bring additional returns and diversify risk. However, currency exchange rate fluctuations may have a positive or negative impact on the value of your investment.
  • The Ordinary Shares may trade at a discount to the Net Asset Value per Ordinary Share and Shareholders may be unable to realise their investments through the secondary market at the Net Asset Value per Ordinary Share.
  • There is no assurance that the Company will be able to secure suitable logistics assets. This may affect the Company’s ability to meet the Target Returns and may have an adverse effect on the Company’s performance, financial condition and business prospects.
  • The Company may hold a limited number of investments. If one of these investments declines in value this can have a greater impact on the fund’s value than if it held a larger number of investments.
  • Property values are a matter of the valuers’ opinions and can go up and down. There is no guarantee that property values, or rental income from them, will increase so you may not get back the full amount invested.
  • Property investments can take significantly longer to buy and sell than other investments, such as bonds and company shares. If properties have to be sold quickly this could result in lower prices being obtained for them.
  • The Company invests in a specialist sector and it will not perform in line with funds that have a broader investment policy.
  • Derivatives may be used, subject to restrictions set out for the Company, for efficient portfolio management in order to manage risk. The market in derivatives can be volatile and there is a higher than average risk of loss.

Other important information:

Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1XL. Registered in Scotland No. 108419. An investment company should be considered only as part of a balanced portfolio. Under no circumstances should this information be considered as an offer or solicitation to deal in investments.

Find out more at: https://www.eurologisticsincome.co.uk 

Risk warning
Risk warning
The value of investments and the income from them can go down as well as up and you may get back less than the amount invested. Please refer to the relevant Key Information Document (KID) prior to making an investment decision. Please be aware of scams that can affect investors.