Recent geopolitical frictions and protectionist shifts have ensured that ‘shoring’ (friend, near and re) is often in the headlines. The recently released European Real Estate Logistics Census, conducted in collaboration with Savills, reveals interesting trends on this hot topic.
- A quarter of occupiers said they had shortened their supply chain to mitigate risks from disruption in the past three years. This is a substantial proportion when considering the scale of the undertaking/bedding-in period associated with supply chain shifts.
- When it comes to intentions, several large corporates specifically flagged reshoring as being on their agenda. Even more are considering re-shoring in its many forms: 30% of retailers and 27% of manufacturers are intending to diversify their supplier base further, and 26% and 17%, respectively, to diversify and/or flex routing.
These findings suggest a significant impact on UK and European logistics real estate markets in the years to come:
Mature markets: In the UK, we’re seeing manufacturing account for a higher proportion of take up, reaching 25% in the past 12 months. Given the complexity and costs associated with re-shoring, we expect this to be a multi-year trend as companies assess and commit to a process that can be operationally challenging.
For markets like the UK and Germany, strategically important high-tech, ultra-modern manufacturing (such as chip manufacturing, medical equipment or green technologies) is currently at the forefront of additional demand. However, a fast-changing geopolitical and regulatory environment could easily broaden the mix.
Emerging markets: Central and Eastern Europe is also clearly a beneficiary. More than 50% of take up in the Czech Republic over the past 12 months is from manufacturers, including global corporates such as Goodyear and Panasonic (CBRE), and the survey shows this market will remain a top destination for expansion.
Institutional real estate investors should take note, though, that while demand is always important, it’s only one component of market dynamics. Many Central and Eastern Europe countries don’t have the same barriers to new supply (in terms of land availability and planning) compared to more mature Western European markets and this may impact future rental growth.
Due diligence: Investors, therefore, need to undertake careful assessments to ensure that they are pricing risks appropriately. This includes the impacts of regulatory change, as well as traditional factors such as location, building specificity, lease-length/terms and covenant.
Manufacturing demand often has very specific requirements regarding both building specification and location. While much of this demand historically landed in core distribution locations, reshoring potentially also opens new opportunities.
Large manufacturers with extensive supply chains don’t always need to locate close to specific consumer markets or in the heart of traditional distribution hubs. They can select bespoke locations, especially if these enjoy lower competition for labour, access to power to run hi-tech operations and proximity to national or international transportation networks. While not re-shoring specific, we’ve seen prestige automotive brands do just this in Germany over the past year. This is rarer in the UK, however, where its smaller physical size creates a denser urban landscape compared to mainland Europe.
While the bespoke nature of both the location and building specifications makes covenant strength and lease length all the more important for investors, re-shoring is likely to offer highly appealing, frequently blue-chip, covenants. Moreover, companies don’t reshore in isolation: much of the halo effect manifests through 3PL demand. From a covenant perspective, though, it’s worth noting that the sector is in transition, with smaller players often facing cost, margin and investment pressures.
The data we’re seeing clearly supports the market’s interest in re-shoring in both mature and emerging markets. The implications are nuanced, however – and, as ever, it’s important for investors to understand, and price accordingly, the exposure they’re taking. But alongside the further evolution of e-commerce and the omnichannel model and significant changes in the 3PL market, the potential for reshoring as a driver of demand is compelling.
Published in Green Street News: 16 October 2024
