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Changes in the drivers of distribution have been slow to make an impact on the European industrial property sector.
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Pan-European distribution seems a logical solution for a pan-European market, yet wide differences remain between the sophisticated warehouse properties available in say the UK or Belgium and more traditional parochial markets found more prevalently across the continent.
Over the last decade, the non-food retail market has become increasingly international. With some 75% of products destined for the European market sourced from outside the EU, the effective management of international supply chains is critical in order to ensure that the consumer demands are met. However, in the main European markets – the UK, France, Germany, Italy and Spain – inbound logistics costs can average between 10-30% of total costs suggesting that supply chains are not optimal for customers or retailers.
The food supply chain tends to be shorter, more local and able to respond more quickly to changes in demand. However, here too there have been significant changes with food products moving far more quickly from harvesting/ production to the consumer and more exotic produce being made available year round.
These changes are part and parcel of a number of megatrends that have affected the overall supply chain. These include: outsourcing; a desire for more flexible, responsive supply chains; globalisation of manufacturing; and growing IT capability.
Each of these trends hold significant changes for the nature and location of warehousing facilities and in each area “continental Europe” is some way behind the UK in their implementation. Notwithstanding the range of warehousing requirements away from the cutting-edge of logistics.
Taking outsourcing as an example. In the UK roughly 80% of transportation is outsourced, along with 70% of warehousing and some 22% of inventory management.
In France, by comparison, the rate of outsourcing for transport is estimated at over 70%, but is still less than 50% for warehousing and only 10% for inventory management.
This describes both the problem and the opportunity. Investors in distribution property are having to second-guess demand for facilities in a market that is seeing significant structural changes to capacity.

On the demand side, the accession of the Central and Eastern European nations in 2004 sets the seal on changes that have been planned for over the last decade. As consumer markets their impact will be relatively small in the short term – in total the economies represent just under 5% of EU GDP (9% on a PPP basis). However as a destination for relocating manufacturing industry the prospects are strong, particularly the central economies – Poland, Czech Republic, Slovakia and Hungary.
These economies bring an additional workforce of 34.5 million into the community. Although labour productivity is well below the EU average, largely as a result of outdated industrial infrastructure, wages are estimated to be around a quarter of those in the EU. With the absence of tariff barriers post May 2004 these become attractive locations for production.
Weaknesses in infrastructure are being addressed, but It has been clear for the last decade that increased trade with central and eastern europe would generate demand for better distribution and logistics facilities. A great deal of the current warehousing stock is either unsuitable for modern distribution methods or away from optimum transport routes.
In addition to the provision of local distribution facilities, there are shortcomings too in the context of cross-border or pan-European distribution.
Historically, distribution facilities have developed regionally and nationally and global supply chains have tended to be grafted onto existing infrastructure. However, in an environment where the efficiency of the supply chain is a competitive weapon, such ad hoc arrangements sit uneasily.
Already, the optimisation of location with respect to source and destination, taking into account distances, weights and associated legislation such as driver hours informs decision making.
As far as real estate is concerned the results of this calculation can be seen, for example, in the East Midlands region of the UK, where distribution is the dominant use for industrial property. It also happens to be at an optimum distance from the major UK ports consistent with distribution to a high number of destinations.
In mainland Europe a pan-European supply chain changes the optimum location for warehousing. However, establishing the optimum location is a complex business. In fact each supply chain will have its own optimum location depending upon sources and destinations.
Nevertheless it is possible to set general parameters. Broadly the best pan-European distribution locations are where common sense dictates that they would be – in the South West of Germany, for example, an optimum distance from the main western European ports.

This is not to say that existing locations are invalid, merely that optimisation algorithms will seek these locations out.
The concentration upon efficiency in the logistics process extends inside the warehouse as well:
• Increased integration with other elements of the supply chain have increased the demand for high bandwidth telecommunications;
• Complex stock management systems are now a standard feature of most larger warehouses; and
• Automated racking and retrieval systems are becoming much more common in buildings of all sizes.
Clearly, these have implications for the specification of the building in terms of power, flooring, eaves heights and clear spans but they also have market implications. It is a complex task to retrofit much modern technology into older buildings. This drives the growth of newly built warehousing particularly.
In truth the evidence for pan-European distribution contracts points to the fact that producers themselves have yet to make this conceptual leap.
Analysis of over 150 contracts issued for distribution in Europe in 2003 show that 87% of them were for national or sub-national areas and only 3% related to truly pan-European distribution.

 

ISSUE Jan 2004
SECTOR Industrial
COUNTRY All
MARKET All