Savills BREXIT Briefing

1. Savills World Research
UK Logistics
July 13th 2016
THE IMPACT ON THE UK
LOGISTICS MARKET
Brexit Briefing
REASONS TO BE
CHEERFUL......
SUMMARY
Robust occupier take-up and low vacancy rate will keep sector attractive for investors
■ Since the result of the referendum
very little official data has been released
to help us form a view on how the
UK logistics sector will be impacted.
It will however be crucial to monitor
consumer confidence, retail sales
(online in particular) and automotive
export figures.
■ Fundamentally the supply and
demand dynamic in UK logistics is
robust. Half year take-up for 2016 is
on par with 2015 and even taking into
account the committed development
pipeline supply is at an all time low. This
contrasts dramatically to 2009 when
supply was 94m sq ft, compared to
30m sq ft now.
■ The initial response in the investment
market has been mixed and greater
clarity will emerge in the coming days
andweeks.Coreactivebuyersremainin
the market and post Brexit transactions
are now starting to complete, we are
also seeing competitive bids for prime
logistics units.
■ Should the development market slow
down in the second half of the year, as
wesuspect,thenconstructioncontracts
could be priced more competitively. In
turn this could create an opportunity for
occupiers to commit to build-to-suits
and developers to build speculatively at
lower costs.
“Generally, we expect
speculative development activity
to slow in the second half of
2016. Combined with continued
strong demand for warehouse
space we therefore do not
foresee a supply side shock
adversely impacting rents and
investment volumes”
Kevin Mofid, Savills Research
BREXIT
BRIEFING

2. savills.co.uk/research 02
The impact on UK Logistics | Brexit Briefing 13th July 2016
BREXIT
BRIEFING
The impact of Brexit on all of the
UK's property markets will be very
dependant on the macro-economic
background, and this in turn is
dependant on how the UK consumer
responds to the news and the
evolution of the story over the next
two to three years.
This paper is our first analysis of how
this new world might affect the UK
logistics market. It, and its sister
papers on other UK and European
asset classes, will be updated on
a regular basis over the following
months as hard data, anecdotal
news, and our forecasts evolve.
Macro factors & the
logistics impact
Since the result on the 24th of June
official data has been in short supply.
In the immediate aftermath of the result
currency and equity markets have
performed erratically and very little has
transpired as to how the consumer is
responding.
Any tangible impact on the UK logistics
property market will take time to
become visible but to guide our views
there are a number of data points worth
mentioning.
The first is consumer confidence. Data
from the OECD shows household
expenditure accounted for 65% of
GDP in 2015. Over the last ten years
the retail sector has accounted for 43%
of all the warehouse space transacted,
the fortunes of both sectors are clearly
intertwined. The first indicator of
consumer confidence came on 7th
July when GfK released their initial
post Brexit index, demonstrating the
sharpest contraction for 22 years.
We will be watching with interest as
we suspect this will rebound over the
summer.
Secondly, the shift to online retail is well
documented and currently accounts for
14%ofallsales.Ineconomicallyuncertain
times will the consumer look to online
retailers for cheaper products? Forecasts
vary but Verdict predict that online sales
will account for 17% of retail sales by
2020, reaching £67.2bn. This will help
to keep demand for new warehousing
high as research by Prologis suggests
that for every extra €1bn spent online an
extra 775,000 sq ft of warehouse space is
required. Therefore we will be tracking the
official monthly ONS retail figures.
 Amazon defies the news
1000Number of new jobs
expected to be created
by Amazon in the UK in
2016
Source: GfK
FIGURE 1
UK Consumer Confidence falls in the aftermath of Brexit
Source: ONS
FIGURE 2
Online retail sales continue to climb
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%oftotal
£m
Avg weekly value of internet sales £m Avg weekly value of store sales Internet as % of total

3. savills.co.uk/research 03
The impact on UK Logistics | Brexit Briefing 13th July 2016
BREXIT
BRIEFING
It will also be vital to monitor closely the
performance of retailers in the run up
to Christmas 2016, and then as trading
figures trickle in during January and
February 2017. Once those figures have
been digested by retailers, 3PL's, parcel
delivery companies and the investment
market the path for UK logistics will
become much clearer.
Whilst the importance of the retail sector
is not to be underestimated another key
part of the market is the manufacturing
sector and within that the automotive
sector.Thishasgonethroughsomewhat
of a renaissance in recent years, which
in turn has had a ripple effect for the
property market. In parts of the West
Midlands for example take-up related
to the automotive sector rose from 9%
of the market in 2011 to 50% in 2014.
We will therefore be tracking data from
the The Society of Motor Manufacturers
and Traders who release monthly
manufacturing numbers along with the
proportions for export. We will then
be able to ascertain if any uncertainly
surrounding trade negotiations starts to
impact this sector, which could in turn
impact the logistics sector.
Lastly we will be watching for
announcements on key infrastructure
projects. A decision regarding airport
capacity has already been delayed "until
at least October". The construction of
Hinckley Point Nuclear Power Station,
the HS2 line and rolling stock and
a new runway in the South East all
have the potential to create localised
pockets of warehouse demand as
existing occupiers are displaced and
construction supply chains require
additional warehouse space
The occupational
market
Since the last down-turn new
development in the logistics sector
has generally been constrained as
just 13.65m sq ft has been delivered
since 2012 compared to 40.47m sq ft
from 2005-2009.
Combined with strong recent levels of
take up this has ensured that supply
has decreased from 94m sq ft in
2009 to 30m sq ft in July 2016 which
gives a national vacancy rate of just
7.1%, significantly below long term
averages.
Savills are tracking 6.7m sq ft across
35 schemes for delivery in 2016/17
and we envisage that speculative
announcements will reduce in the
second half of 2016 until the political
and economic situation stabalises.
However, it should be noted that since
the referendum result development
activity has not halted. Funded by
M&G, The Rigby Group has confirmed
speculative development of 575,000
sq ft across 3 units in Coventry, due
for completion in June 2017.
Given the continued shift to online
retail we believe that logistics take-up
levels will remain robust. Indeed in just
5 years the average amount of space
transacted across the country has
increased from 19.5m sq ft per year
to 22.4m sq ft year. Crucially too, the
volume of deals has also increased
standing at 121 per year over the last
3 years, an increase of 44%.
Since the result of the referendum two
bell-weather occupiers have committed
to new warehouse space. Automotive
manufacturer Jaguar Land Rover (JLR)
has taken two units at Prologis Park
Ryton which total 470,000 sq ft and we
are aware that online retailer Amazon
have committed to a further 555,000
sq ft. The importance of these two
occupiers should not be understated.
Continued investment by JLR will
require their suppliers to locate nearby
and the continued roll-out of Amazon
Fresh and Prime Now will not only
require new warehouse space, but will
also force other retailers to adapt their
supply chains to compete.
Combined, the strong levels of take-up
and low vacancy will ensure rents
maintain their upward trajectory.
Source: Savills Research
FIGURE 3
Logistics supply has fallen dramatically
Source: Savills Research
FIGURE 4
Online retail & parcel delivery proportion of market increases
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100
2009 2010 2011 2012 2013 2014 2015 2016
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20%
30%
40%
50%
60%
70%
80%
90%
100%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Parcel and Online Others

4. savills.co.uk/research 04
The impact on UK Logistics | Brexit Briefing 13th July 2016
BREXIT
BRIEFING
For further information please contact
Savills plc
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Richard Merryweather
Investment
0207 409 8838
rmerryweather@savills.com
Richard Sullivan
Agency
0207 409 8125
rsullivan@savills.com
Simon Collett
Building Consultancy
0207 409 5951
scollet@savills.com
The investment market
The initial response in the investment
market has been mixed but we expect
greater clarity in the market once the
financial turbulence and the noise
around the retail fund closures has
quietened. Thursday 14th July will
also see the Bank of England's MPC
meeting where further clarity and
forward guidance regarding the base
rate will be offered.
Over the past five years investors had
become increasingly comfortable with
logistics as a global asset class, driven
by the shift towards online retail and the
long term secure incomes the sector
offers. Indeed in 2016 so far two of the
three keenest net initial yields paid have
been for Amazon units, 4.5% at Bardon
and 4.66% at Airport City, Manchester,
both to overseas investors. Given the
fact that we expect the occupier market
to continue to benefit from the shift to
online retail, opportunities for investors
should continue to present themselves.
Indeed, the continued relative
attractiveness of the sector has
continued into 2016 with, at the half
year point, investment volumes down
just 11% on 2015 volumes totalling
£2.6bn, a smaller decrease than any
other sector.
Whilst we do not expect many
immediate distressed sales in the sector
the key point to note is that there remain
active core buyers, which was not the
case at the start of the GFC in 2008/9.
In particular, given the current value of
sterling, overseas investors may start
to make up a greater proportion of the
market.
By way of example, we are aware
that since the referendum a number
of industrial deals have completed
or exchanged including the sale of
Chrome 102 in Minworth at a net initial
yield of 5.05% and there is competitive
bidding on other prime logistics units.
Key to continued liquidity in the sector
however will be how pricing stablises.
Any occupational requirement over
420,000 sq ft will have to be serviced
by a pre-let, which typically have been
financed by an annuity style deal (for
strong covenants), where we expect
little or no discount in the future.
Build costs and
Programme
The latest indicators from the recently
launched Savills ProgrammE and
Cost Sentiment Survey (S.P.E.C.S)
demonstrate that build costs and
programme delivery time scales have
had an upward pressure throughout
2016. If the development market does
slow down in the coming months this
will have an impact on build costs
as tenders and contracts are priced
more competitively, although we are
yet to see any evidence for this.
This could be timely for both
occupiers and developers as given
the lack of supply in the market for
larger warehouse units any occupier
requiring a larger units will have to
commit to a build-to-suit, potentially
now deliverable at a lower cost.
On the other hand developers and
investors higher up the risk curve may
also choose to develop warehouse
space speculatively, in the hope of
delivering product to the market
without competition, again at a lower
cost and also in a quicker time frame.
n
MORE ON
BREXIT:
We will be
publishing
further
reports
on specific
topics, see
our website
for details
Kevin Mofid
Research
0203 618 3612
kmofid@savills.com
Source: Savills Research
FIGURE 5
Logistics investment volumes remain strong
£32-37Cost per sq ft for constructing
warehouse space between
400-000- 600,000 sq ft
£0.0
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