Logistics developers shouldn’t let cost inflation hold them
back, Richard Taylor writes in React News

There is little to be gained from waiting for construction cost inflation to ease, says Richard Taylor, Partner, Venture, Workman Project Management

The world of UK real estate investment is buzzing with many sectors showing signs of resurgence. But the standout is warehousing and logistics, where competition is at an all-time high.

The UK boasts warehouses covering almost 10,000 football pitches, a vast 566m sq. ft, according to the UK Warehousing Association (UKWA), but industry analysts suggest much of this space is already occupied.

Demand is outpacing supply by a considerable margin and is projected to do so for the foreseeable future.

The spectre of construction inflation

Basic economics tells us that high demand vs low supply results in higher prices, so those investors who are holding, or developing in the sector, should surely be happy with returns? Maybe in the past, but now inflation in the construction industry is soaring at such a rate that numbers are making less sense, and appraisals are creaking under the pressure while rental levels catch up.

We could easily find ourselves in the strange scenario where the supply of new space becomes hindered by a construction industry knocked off balance due to unprecedented cost increases driven by inflation; and undermined by market agitation produced by fears of further price adjustments.

To put this in context, steel work, cladding, concrete, and M&E costs have surged by more than 23% in the past 12 months, according to the Department for Business, Energy and Industrial Strategy (BEIS). These packages alone make up around 75% of the cost of a shed. It is no surprise that shockwaves are bouncing around the contracting sector.    

What are the options?

The cause of such inflation within the UK market is the subject of much speculative chatter amongst developers. Is this real inflation, or market correction? How long will it last? Should we blame Covid, our monetary policy, Brexit, China, or all four? Though these discussions are natural, and understandable, those at the operational level need to quickly decide whether they believe in the data, and if so, how to react.

Competitive tendering has been under-utilised in recent years, so will this make a difference? Perhaps, but given inflation starts at the supply chain base with raw materials and labour costs, over which contractors have little sway, the impact of competition may be minimal for certain packages. Tendering takes time, and time is money, now more than ever.

Should investors wait until 2022 to test the market again, allowing manufacturers to catch up, to free-up more supply, thus bringing down prices? Maybe, but this is a gamble: rising labour and material costs may begin to spread uncertainty into other sectors, compounding into further inflationary pressure.

Instead, investors need to accept that the sands are shifting too quickly for reliable cost forecasting. All that is certain are our current prices, and given that market corrections take time, the best we should hope for in 2022 is a plateau.

So, if a warehouse or logistic scheme is viable at today’s prices, perhaps the only sensible approach is to get on, build it, and quickly.  

By Richard Taylor, Partner, Venture, Workman Project Management

A version of this article first appeared in React News.

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