Marcus Emadi | Director at Turning Point Capital
CONTENTS
The Macro Picture
November 2024 saw the Bank of England agree to cut interest rates by 25 basis points to 4.75%, the second cut in three months. The cut was motivated by the need to stimulate the economy after inflation fell below the target rate of 2%. Further rate cuts are expected in 2025 and are likely to come more quickly if economic growth stagnates and inflation remains low. Lower interest rates reduce the cost of credit for consumers and businesses, making loans and mortgages more affordable. As interest rates fall, disposable incomes and business investment rise. The resulting increase in economic activity will drive logistics demand and support a recovery in the UK market.
When it comes to the economy, policymakers have two levers to pull: monetary policy via the central bank and fiscal policy via government spending. The new Labour government’s budget includes a significant increase in government spending, which should help boost the overall economy. £100 billion is earmarked for infrastructure investment over the next five years. This allocation will increase capital investment in areas such as transport, housing, and research and development (R&D). Notably, the Office for Budget Responsibility (OBR) projects that the changes in fiscal rules could increase GDP by 1.4% in the longer term.
The government plans to release a ten-year infrastructure plan in 2025. From the priorities laid out in its manifesto in the run-up to the election, we would expect to see Labour invest in Clean Energy Initiatives, pledging to double onshore wind energy, triple solar power, and quadruple offshore wind capacity. The manifesto further promises to construct more railways, roads, laboratories, and 1.5 million homes. Crucially, these plans will inevitably stimulate greater construction activity, creating demand for the storage and transport of construction materials.
The resulting job growth from the construction, maintenance, and operation of these projects is expected to be significant. The decentralisation of the projects should also help to spread growth across the regions, stimulating local economies. Greater infrastructure investment should improve productivity and foster secondary economic activity in the long run.
2024 has seen a steady improvement in the economic outlook, albeit at a slower rate than previously hoped. In July, the IMF improved its outlook for GDP growth in the UK from 0.5% and 0.7% in 2024 and 2025, respectively, to 1.5% in both years.
Crucially, the outlook for the consumer economy is also strong, with Oxford Economics predicting real disposable income growth of 2.0% in 2024 and 1.3% in 2025. This is expected to drive stronger growth in real consumer expenditure, which will accelerate from 0.6% this year to 2.1% in 2025. Higher consumer expenditure should drive retail sales and potentially reactivate demand from many of the retail occupiers who have put expansion plans on hold over the last two years.
The Market Picture
The Return of the E-commerce Players?
The growth of the e-commerce sector has been one of the key drivers behind the growth of the industrial and logistics sector over the last decade, with 22% of all the space transacted falling into the sector since 2018.
Recent years have, however, seen a drop off in demand, with online retailers accounting for just 7% of the market in 2024. However, is the stage set for a resurgence in demand from the sector in the UK?
A recent study from FedEx has predicted that parcel carriers will collectively distribute 1.29 billion shipments across the UK between October and December 2024, 10.9% more than in the same period in 2023 and the largest growth rate across Europe.
Data from Amazon also paints a picture of growth, with its global net sales increasing by 11% in the first half of 2024 when compared with 2023.
In the USA, Amazon has added 50 million sq ft of new units to its estate in 2024, which will be its third-highest increase ever after the pandemic years of 2021 and 2022.
With Statista forecasting that UK e-commerce revenue will rise by £42 billion and penetration will reach 28% by 2029, it seems likely that the warehouse space needed by e-commerce players will continue to grow.
A New Source of Demand from the Data Centre Sector?
The data centre market is poised for significant growth in the coming years, with forecasts indicating a substantial increase in demand, particularly when it comes to artificial intelligence (AI). In fact, the European AI market is expected to grow by 25.9% in 2024, with annual growth of 15.9% until 2030. As a result, competition for suitable development sites is heating up.
Historically, the location of a data centre was closely aligned to the financial markets and fibre connections, but with the emergence of AI and cloud computing, facilities are becoming increasingly location agnostic. Instead, they are driven by power availability and, ultimately, site deliverability.
This means that geographies that were previously unattractive to data centre operators are now being shortlisted for future developments. Indeed, in the UK over the last twelve months, we have seen deals in Yorkshire, Wales, and the North East, whereas previously, nearly all transactions were centred around London and the South East.
Looking ahead, expansion plans are set to accelerate. Over the next four years, Europe is expected to add 3,110 MW of data centre capacity, averaging a 9% growth rate, bringing the total to around 11,400 MW by 2028.
Looking at the UK, since the start of 2024, Savills has tracked over 415 acres of land deals to data centre operators. Nearly all of these sites have previously been promoted for industrial and logistics use, and combined, could have delivered 8.3 million sq ft of warehouse development, assuming normal development densities. Typically, the UK sees 8.7 million sq ft of speculative development per year, so already close to one year’s worth of potential new supply has been removed from the market.
This new source of demand provides a welcome fillip for developers across the country with sites that have a lot of power. Conversely, it also means that the development-ready landbank becomes smaller, suggesting that the market will see less speculative development, which should keep vacancy rates lower than expected and therefore stimulate rental growth.
Years of Supply Increasing, but Manageable When Compared to Recent Peaks
With supply rising to levels not seen for over a decade, it is important to set this in the context of recent history.
Years of supply by unit count is one of our preferred methods of examining market dynamics as it strips away the volatility of analysing the market by square footage whilst also considering current and pipeline supply along with recent take-up trends and is, therefore, a good way to understand if pockets of the market are undersupplied or oversupplied.
Calculating years of supply for Grade A properties at a UK level shows that whilst this metric has risen from a Covid low point of 0.5 years of supply to 1.8 years of supply, we are still a long way from where the market was prior to the start of the pandemic when years of supply for Grade A reached 2.4 years.
At a regional level, history also tells us that this metric has been even more volatile. Taking the South East as a good example where the Grade A years of supply is currently 1.75 years shows us the market has not reached its long-term average of 2.1 years and is nowhere near its peak of four years, which was reached in 2016.
In the West Midlands, the combination of a lower recent development pipeline and higher existing unit take-up, years of supply is starting to fall. Assuming existing unit take-up remains stable and the development pipeline continues to fall, we expect other markets to follow suit into 2025.
Wider Issues
Will Recent Budget Changes Push Occupiers Towards Freeports?
UK freeports are special economic zones that have various unique rules. Globally, freeports have existed for centuries to drive inward investment and job creation in disadvantaged communities through incentives for eligible businesses, although the first examples in the UK did not appear until the 1980s. Companies located within freeports receive tax and customs incentives such as enhanced capital allowances, business rates and stamp duty relief, as well as lower employer national insurance contributions.
These benefits have come into sharp focus since the recent budget delivered by Chancellor Rachel Reeves in October, which will see companies hit with increased national insurance contributions and business rates liability when opening new warehouse premises.
Whilst take-up in freeport areas has currently been limited, we are seeing a surge of enquiries from occupiers keen to explore the benefits of locating in such areas.
Nearshoring Continues to Grow in Importance
Against a backdrop of transportation bottlenecks, geopolitical tensions, and ambitious sustainability targets, the logistical shocks from Covid-19 made businesses rethink their global supply chains.
Nearshoring emerged as one of the solutions – the Savills and Tritax EuroBox 2023 European Real Estate Logistics Census found that occupiers highlighted a ‘reduction in reliance on foreign imports’ and a ‘shortening of supply chains’ as the top two changes planned for the next two years.
In the latest Nearshoring Index produced by Savills World Research, the UK ranks 10th globally in terms of attractiveness for nearshoring. This is already filtering through to our data on the UK market as take-up from manufacturers has seen more growth than any other sector, rising by 32% since 2021, and now accounts for 58.5 million sq ft of UK warehouse space.
However, reorganising supply chains does not come cheap and is driven by a myriad of factors, including government policy and subsidies. We therefore continue to believe that the nearshoring phenomenon will produce steady demand in the market over an elongated time period.
