2022 Regional Property Review

The industrial real estate sector in Kent shows no sign of slowing in the medium term. Despite the UK economy being on the brink of a downturn and the Bank of England forecasting a GDP decline equivalent to that seen during the 1990s recession - The imbalance between industrial land supply and demand and low property vacancy rates means the region’s real estate represents more stable returns than the yields on government bonds.

The yield potential from Kent’s imbalance and the opportunity its proximity to the capital and ports has been recognised by global real estate investors like Mount Park, Panattoni, Prologis, Uniper and most recently Arax. UK investors like Bericote, Clearbell, Tritax and Wrenbridge all have schemes underway.

Just as couples and families have migrated from London over the past 20 years to fill Kent and Medway’s newly built homes, businesses have relocated too. London has lost 24% of employment land to housing over the last 20 years (Industrial Land Commission, 2022). That is 5.7 million Sq. Ft. (530k sqm) of industrial space to largely residential use since 2011?(Savills, 2022).

Most of those employers are now operating in areas around the M25, especially on the Thames Estuary. Industrial vacancy rates are at record lows; driving Kent’s employment land values to match residential and in some areas, doubling. Since 2017, the average land price for industrial land has increased by 175% according (Savills, 2022). The markets that have experienced the most significant growth in land values are East of London, like South Essex and North Kent where populations and jobs are set to also increase by the highest margins.

Demand for industrial properties remains high. The Locate in Kent Property Portal handled almost 79,000 property searches and registered over 21,000 new users to access the site in the year to 31 July 2022. Each user typically looks at 5 properties. Half of the property searches were for industrial space or employment development land. The outcome, 316 property enquiries were generated and distributed directly to agents.

Right now, Locate in Kent’s active pipeline contains 132 employers with requirements for industrial space. The mean requirement is 34,300 Sq. Ft. (3,200 sqm).

However, the deals completed are falling due to a shortage of suitable space. According to EGi data, there were 157 industrial lease deals in Kent and 14 sales in the year to 31 July 2022. This is 25% down on the same period the year before, 171 deals over 227. The average deal size to 31 July 22 was 18,396 Sq. Ft. (1,709 sqm) for letting deals and 6,783 Sq. Ft. (630 sqm) for sales deals.

Industrial shed demand in Kent is differentiated by use and tenure, leased logistics and freehold manufacturing facilities.

THE LOGIC OF LOGISTICS

The fundamentals of the warehouse property sector remain strong.

Firstly, as our charts show, underlying demand and undersupply means the market will remain buoyant. Statista Research shows the UK vacancy rate of industrial and logistic real estate is just 5%. It has been falling since 2010 when it stood at 15.4% and is lower in Kent (Statista, 2022). Despite the cost of construction increasing and start to practical completion taking longer due to supply chain issues; rents show no sign of going the other way.

Secondly, with plenty of capital looking for a home and investors needing predictable returns; logistics presents investors with an inflation hedge. Rent reviews are the best way to maximise returns in a high demand/low supply market, yet anniversary inflation linked increases can just as effectively lock in landlords and tenants to sustain capital provider’s yields over 20 year periods to offset inflation.

In any case, the cost of rent is less than 5% of the cost of operating a logistics operation, salaries, road costs and energy represent more like 85%. Hence location being such an important factor and Kent’s appeal. So, it is no surprise Knight Frank’s Logistics Market Outlook shows, 39.7% of the UK All Balanced Property Fund Index is invested in the industrial sector in Q4 2021, up from 33.2% in Q4 2020 and from just 16.4% nine years ago (Knight Frank, 2022). Industrial and logistics assets are set to continue to outperform all other real estate sectors.

Thirdly, despite inflation rising since early 2021, consumers continue to shop. One could argue, consumers facing the increased cost of living will turn to online shopping more to find better prices. Equally, given the choice of retail space or warehouses, warehouse distribution offers retailers a more responsive lower cost model and stock accordingly. Especially well located and well designed facilities.

Retailers need the capacity to hold large volumes of stock and not large amounts of retail space. CBRE predicts there is demand for another 59 million Sq. Ft. (5.5 million sqm) of logistics space until 2025 just to meet the growing online sales demand (CBRE, 2021).

Online retail is forecast to reach 35% of all shopping by 2025 (Mastercard, 2022) against the backdrop of the Bank of England’s warning that a UK recession will begin in the fourth quarter 2022 and last all the way through 2023. Combined with the population of London set to increase to 9.7 million by mid-2024, the need for good quality warehouse space in Kent is set to increase even further.

The British Property Federation, tenuously estimates 69 Sq. Ft. (6.5 sqm) of warehouse space is required for every new home that is built. Multiply that by the million new homes set out in combined local plans for London and the South East over the next ten years and you get to a very big number of warehouse space needed indeed.

However, this positivity needs to be balanced with Amazon’s retrenchment. Cushman & Wakefield reported the multinational let as much as a third of UK warehousing space in the last half of 2020 which acted as a major catalyst for aggregate industrial property demand. (Thame, 2022) But data from a Canadian logistics analyst, MWVPL, suggest a correction in strategy. (Fortune, 2022)

MWVPL says Amazon overbuilt its distribution network in 2020 and 2021, adding 60% more floorspace globally while sales grew by 37%. The result is a programme of “cost avoidance,” by delaying expensive greenfield developments, serving markets from existing fulfillment centres and pulling out of warehouse deals that haven’t reached final agreement. It is not so much the floorspace they don’t want as the payroll bill and fit-out costs that go with it.

Closures of existing warehouses are not expected and Amazon continues to advertise vacancies at their Kent facilities in Chatham, Dartford, Maidstone, Orpington and their new scheme in Ashford. “They are not slamming on the brakes, they are easing off the gas pedal,” the commentary says.

CHANGING DOMESTIC MANUFACTURING STRATEGIES

Covid-19 has accelerated onshoring to present a genuine opportunity for wholesale industry transformation leading to demand for more industrial space from Kent’s makers.

The UK is the 9th largest manufacturing economy and the 10th highest exporting economy by value. Much of UK manufacturing is based on importing raw material and smaller parts to combine for higher value exports. Think automotive, pharmaceuticals, fashion and the machines used in factories to make more things.

England’s South East region has the UK’s largest concentration of manufacturing facilities with some 285k people working in the sector. In Kent, we are at the forefront of food processing, construction supply chain and FMCG manufacturing sectors (Make UK, 2022).

As with other global mega trends, the pandemic has accelerated the change that was already underway in this sector. Currency fluctuations as the Global Financial Crises is unwound, the trebling of shipping costs from China, Brexit, the infamous Suez Canal blockage and the industry recognising the value of Just in Time over low cost has all contributed to manufacturing growth in Kent. Not necessarily in the number of factories, but in the amount and value of work no longer subcontracted in offshore.

The Brexit and Pandemic combination delivered net EU emigration for the UK for the first time in twenty years. Just as factories want to grow, there are fewer people to work in them. The result is record capital investment in automated capacity. According to Make UK, the latest available figures the UK invested over ￡31 billion (US$35.8 billion) in manufacturing. The classic economic move to swap labour for capital (Make UK, 2022).

Interest rate increases could slow investment growth, but we expect this to be offset by the sheer scale of underlying demand and the rush to spend before the 130% corporation tax Super Deduction ends in March 2023.

As manufacturers replace people for machines to onshore, they need space for their new kit and to hold more pre production materials. Unlike logistics which has constant cashflow, manufacturing is a less liquid enterprise. Orders don’t always come on a steady state curve and investment decisions and orders can take years to secure and fulfil. The business model and balance sheets of manufacturers don’t lend themselves to 20 year leases – they cannot easily close and move to a nearby box due to an unfavourable rent review. Manufacturers need freehold.

Kent is the destination of choice for manufacturers in the South East.

Firstly, it is adjacent to the greatest and most global city in the world, London and is the point where the European Single Market meets the UK. Dover alone handles around a sixth of all UK cargo vessel arrivals each year and over ￡100 billion (US$120 billion) of trade in goods passes through the port each year (Port of Dover, 2022).

Secondly, there are the forthcoming showstopper infrastructure investments. ￡26 billion (US$31 billion) to build the Lower Thames Crossing and ￡500 million (US$578 million) private investment in reopening Manston as an international aviation freight hub, plus resolving the planning uncertainty for the London Resort that would unlock ￡8 billion (US$9.25 billion) and create some twenty thousand new jobs over the next five years.

Thirdly, Housing Infrastructure Funding is enabling development. HIF has enabled Junction improvements on the A2/M2 at Ebbsfleet and Sittingbourne that will unlock more potential, especially for some hard-to-reach investment opportunity areas like the Isle of Sheppey. Medway’s ￡170 million (US$196.6 billion) on the Hoo Peninsula includes road improvements and a rail connection to Gravesend that is just 22 minutes from downtown London on the UK’s only operational High Speed train service.

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RESEARCH CITED

GBP/USD Tuesday 6 September 2022 ￡1=$1.1564 (OPEN)

CBRE, 2021. Logistics Occupier and Investment Demand. [Online] Available at: https://news.cbre.co.uk/uk-real-estate-recovery-set-to-be-faster-than-previously-predicted-says-cbre/ [Accessed 6 September 2022].

Industrial Land Commission, 2022. Making Space: Accommodating London’s Industrial Future, s.l.: Centre For London.

Fortune. 2022. Amazon closes or abandons plans for dozens of warehouses as it goes from expansion mode to belt-tightening. [online] Available at: <https://fortune.com/2022/09/02/amazon-warehouse-expansion-ends-hiring-workers-andy-jassy/> [Accessed 6 September 2022].

Knight Frank, 2022. [Online] Available at: https://www.knightfrank.com/research/report-library/uk-logistics-outlook-2022-8895.aspx [Accessed 6 September 2022].

Make UK, 2022. UK Manufacturing Facts. [Online] Available at: https://www.makeuk.org/facts#/business-investment [Accessed 6 September 2022].

Make UK, 2022. UK Regional Facts. [Online] Available at: https://www.makeuk.org/facts#/regional-breakdown [Accessed 6 September 2022].

Mastercard, 2022. Apex Insight. [Online] Available at: https://apex-insight.com/mastercard-uk-leads-e-commerce-market-penetration/ [Accessed 6 September 2022].

Port of Dover, 2022. About Us. [Online] Available at: https://doverport.co.uk/port/about/operation-important/ [Accessed 6 September 2022].

Savills, 2022. The London Land Challenge. [Online] Available at: https://www.savills.co.uk/research_articles/229130/329623-0# [Accessed 6 September 2022].

Statista, 2022. [Online] Available at: https://www.statista.com/statistics/1263904/vacancy-rate-industrial-and-logistic-space-in-the-uk/ [Accessed 6 September 2022].

Thame, D., 2022. Amazon accounts for a third of UK warehouse floorspace let this summer. [online] SHD Logistics. Available at: <https://www.shdlogistics.com/amazon/amazon-accounts-third-uk-warehouse-floorspace-let-summer> [Accessed 6 September 2022].