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Shed Sector Shakeout Speeds Up

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TNT lorries HGV vehicles

A renewed round of mergers and acquisitions in the U.K. logistics sector could mean new opportunities — and risks — for landlords and investors.

According to UK Logistics Confidence Index 2017, prepared by Barclays Corporate Banking and Moore Stephens, the shed sector is about to undergo another upheaval as a spate of mergers and acquisitions speeds up industry consolidation.

Investors will be taking note. According to BNP Paribas Real Estate, in the first half of 2017 the U.K. market increased significantly (up 18% on H1 2016) to £4B invested despite the scarcity of products and political and economic uncertainties. Logistics prime rents remained fairly stable during the year whilst prime yields stabilised in to 4.75% in the main hubs of Birmingham, London and the South East.

However, BNPRE said take-up is already slowing as the occupational market rethinks. U.K. take-up decreased to 13M SF in the first half of 2017 (down 14% compared to H1 2016). The manufacturing sector — not logistics — accounted for the largest share of industrial take-up, due to some major auto sector transaction in the outskirts of Birmingham.

The Barclays/Moore Stephens report reveals that almost half (45%) of the companies that dispatch and deliver goods across the U.K. feel business conditions have become more difficult in the last year, with 61% saying they expect Brexit to have a negative impact on their businesses. The good news is that — so far — Brexit fears have not prompted logistics operators to change their floor space. Just 2% said they have engaged professional advisors and 23% are taking no action at all.

XPO truck

However, the Barclays/Moore Stephens report shows increased appetite for mergers and acquisitions. Four in 10 logistics operators said they are likely to make an acquisition over the next 12 months, a 15% increase over the number of businesses that reported takeover plans last year, and the highest level since the survey began in 2012.

Mergers and acquisitions are a route to growth as it becomes more difficult for operators to obtain new contracts. It follows an extensive reshaping of the global container shipping business — XPO and Kuehne + Nagel are both tipped as acquisition-hungry.

Mergers and acquisitions expectations reflect a level of confidence amongst operators, Moore Stephens partner Philip Bird said.

“There is no doubt that consolidation in the sector has accelerated over the last 12 months and our survey results clearly suggest that this trend will continue. Whilst a large part of historic consolidation has been defensive, aimed at protecting or gaining market share in a very competitive environment, we expect that future consolidation will be driven by the need to access new technologies, faster growing verticals, such as e-fulfilment, and by the need to access new geographies as a result of Brexit,” Bird said.

Shed Sector Shakeout Speeds Up

The big players in the U.K. logistics scene are unruffled by talk of a shed sector shakeout.

LondonMetric Property just acquired the 40-acre Bedford Link site close to junction 13 of the M1 ahead of a 670K SF logistics development. The investor/developer is now in talks with occupiers for four regional distribution warehouses at a total anticipated cost of £60M, delivering a yield of close to 7%.

LondonMetric Chief Executive Andrew Jones said: “We are pleased to be in a position to commence infrastructure works, reinvesting proceeds from our recent disposals. We are still unlocking value within this area of the market and will continue to target yields on cost materially above current investment yields.”

Aviva Investors head of industrial and logistics Mike Green said: “Logistics industry consolidation is nothing to worry about. We don’t have one dominant operator, and we’re unlikely to see operators handing space back, and in most locations good warehousing is in short supply so it should re-let. Unless there’s some very significant mergers and acquisitions it won’t have too much impact on property.”

U.K. industrial is still a target for capital, Green said, but he thinks the sector needs to watch for the impact of labour issues and labour costs on logistics.

Green said he will be focussing on funding speculative development in core locations. “We won’t see much yield compression — that’s already happened,” he said.

Brokers share the steady-as-she-goes mood. Knight Frank capital markets partner Johnny Hawkins said: “The occupational market changing through mergers and acquisitions isn’t worrying, it’s quite exciting. Yield compression will certainly slow down. People are now buying more for rental growth than for capital growth, even so we’re hearing of an estate under offer at Watford with a yield of 4%, another at Stevenage also 4%, so yields are pretty hot.”