According to DTZ Research’s annual European Logistics Markets report, logistics will be one of the many sectors affected by the expansion of the EU in May. The map (over the page) shows the attractiveness of regions as locations for logistics operations based upon the results of a weighted index, constructed by DTZ Research. This index comprises various economic, business environment and transport infrastructure factors such as labour costs, employment, proximity to population centres and business environment measures across 27 countries. The results give an indication of the relative potential for logistics activities in different European regions.
The top ten locations include established logistics locations such as Paris, Milan, London, the Randstad and north-western Germany. However key locations in the CEE countries, such as Bratislava, Budapest and Warsaw also feature in the top ten, scoring well as they are centres of population density and economic activity as well as being lower cost locations.
Interestingly, these CEE locations are ranked higher than some logistics locations in EU-15 countries such as Madrid, Barcelona, Lyon and Frankfurt. This is mainly due to higher labour costs in the latter. Whilst these areas will not cease to be important logistics locations, the type of logistics activity which they attract in the future is likely to be directed toward more local and nationally focused distribution rather than for broader regional or European distribution.
The short term
Although EU enlargement will no doubt have an effect on logistics requirements, key locations in the existing EU-15 are not expected to suffer by the eastward expansion in the short term. For example, the concentration of skills and advantages on the Dutch-Belgian border area would make a rapid eastward migration of pan-European distribution away from the area highly unlikely.
The move to the east is more likely to be geared towards accessing new markets with the EU-15 seeing an increase in competition from the new entrants (particularly Warsaw, Budapest and Bratislava) which are expected to rise in importance on a pan-European basis.
Border countries on the EU-15 side of the current eastern EU border are likely to suffer the most by enlargement. The eastward move of the border and plans for infrastructure improvements will inevitably lead to burgeoning investment and improved business environment in accession countries. Some of these are major competitors in terms of catchment areas, in particular Poland, Hungary, the Czech Republic and the Slovak Republic.
With enlargement there will be free movement of goods across the former EU eastern border from the EU-15 to the accession countries. Whilst this means that the clearing of goods transported across the former EU eastern border will be unnecessary and wait times should be considerably decreased, it will also mean job losses for customs agents and those performing clearing functions. This has been estimated at 22,000 job losses by CLECAT, the European organisation for forwarding and logistics.
Also, despite eventual integration of the candidate countries into all the systems and practices of the EU, access to road and rail networks in some of the accession countries will be restricted for two/three years under the transition arrangements. These arrangements are designed to protect markets in the candidate countries from more competitive businesses from the EU-15. The countries that are introducing transition arrangements are Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Poland and the Slovak Republic.
Across Europe, transport issues are also increasingly coming under the spotlight. Public bodies are particularly interested in modal shift and infrastructure investment, whilst the transport and logistics industry is concerned with costs and benefits associated with moving goods transport away from roads and the accessibility and viability of alternative modes of transport.
Governments and the EU have developed programmes and initiatives – such as the trans- European transport networks (TEN-T) and Marco Polo – in an effort to reduce road congestion and encourage use of other transport networks as alternatives to roads and to ensure important infrastructure development.
TEN-T is expected to be a major element in the balanced and sustainable development of the European Union as well as improving economic competitiveness. Projects adding value to the greater European community attract EU financial support through a variety of funds although projects also rely on national government and private monies.
In June 2003, a High-Level Group reviewing the TEN-T priority projects up to 2020 published its findings announcing those projects that should be started and/or completed by 2020. The projects include rail, road, waterway and shipping channel projects as well as accessibility and interconnections, multimodal links, cross-border connections, congestion relief and Galileo, the satellite navigation system.
Another key development in transport across Europe is the movement of goods transport away from road networks and onto alternative modes of transport, such as railways and waterways. This is being achieved through EU initiatives – such as the Marco Polo programme which seeks to move the modal split of goods transport back to the levels of 1998 – and national programmes – such as the controversial motorway toll system in Germany, although this scheme has recently suffered a major set-back.
Outsourcing non-core services to specialist providers has been an ongoing trend in Europe for several years and one that is expected to continue with major players positioning themselves in key growth markets. Businesses seeking to reduce costs and focus resources on key business areas have increasingly been passing on a wide range of services to specialist providers.
Logistics services are one of the areas where businesses have effectively found solutions with specialist providers and companies continue to see logistics and distribution as an area for potential saving although there are high set up costs. In a recent survey by UPS, almost a quarter of business leaders across the major European economies indicated that if company profits were to fall, their transport and logistics budget would be the first to be cut.
Although outsourcing has grown across Europe as a whole, outsourcing as a trend differs from country to country. The UK is the most highly outsourced market with an estimated 41 per cent of the total logistics spending being outsourced in 2002. The UK is also one of the largest markets in the EU in terms of total outsourced logistics spending. This is in stark contrast to Germany – the largest market both in terms of total and outsourced spending – has a penetration of only 28 per cent.
Cultural differences have meant that outsourcing has evolved differently across European countries. For example, in Italy, there has been a lack of enthusiasm for externalising logistics operations as they are seen as an area of strategic advantage.
The major logistics operators continue to position themselves effectively in the expected growth markets of Germany, Italy and Spain, where deeper penetration of outsourcing is anticipated.
As well as geographic markets, there is the potential for growth in logistics outsourcing in different sectors. For example, logistics relating to pharmaceuticals and healthcare are expected to be of an increasing importance to operators.
Unlike other sectors, healthcare and pharmaceuticals are less affected by seasonal or economic influences. Also, healthcare spending is set to increase across Europe as a result of ageing populations and increasing government budgets.
In efforts to best position themselves in this sector, a number of key players in European logistics markets have established specialist healthcare functions or have acquired operators in this sector.
As an overall business trend (not specifically relating to the logistics sector), DTZ Research also predicts a change in terms of the primary locations within the EU following enlargement. These changes are set against what many regional economists have traditionally identified as a ‘hot banana’ of wealthy regions stretching from South East England, through to Benelux, southern Germany, northern Italy and northern Spain.
The ‘cool carrot’
DTZ Research’s analysis suggests that a ‘cool carrot’ may now represent a better analogy. The top of the ‘banana’ remains significant, but enlargement should increase the importance of key locations in the candidate countries, in particular of Prague, Budapest and Bratislava. This change also represents a shift in Europe’s centre of gravity.
The greatest losers from this are likely to be major cities in Italy and Spain. Although these will remain of importance to their national economies, they will find themselves of less strategic pan-European importance.
In conclusion, the accession of a further 10 countries into the EU in May will undoubtedly bring fresh challenges to the EU-15 from new locations which will be able to offer cheaper land and lower operational costs. However, it is unlikely that we will see a dramatic shake-up of the European distribution picture. When seeking space, logistics operators also rely heavily on the location having an excellent transport infrastructure, something which not all of joining countries currently have and one which most of the major traditional western and central distribution hubs do. In terms of the transport issues, environmentally this is very attractive but I feel we need to get market buy-in in order for this to be successful.
British industrial and logistics locations are amongst the most expensive in Europe with London remaining at the top of the table.
According to DTZ Research, the prime industrial and logistics sector withstood downward pressures and experienced little change in 2003. London Heathrow retained poll position whilst three other British locations – Birmingham, Edinburgh and Manchester – were all in the European top ten.
Occupier demand for logistics space has generally weakened in most markets across western Europe and availability has continued to increase. However despite this, prime assets with good infrastructure links have seen only slight or no deterioration in headline rents – although occupier incentives are widespread.
The major central European markets continued to mature over 2003 with rental levels coming under pressure from the increasing supply of speculatively developed space.
Demand for larger properties is expected to continue over the next few years as businesses and logistics operators centralise logistics operations at hub locations. Modern logistics operators require a high standard of building to meet their operational needs, therefore new and good quality secondhand are the most appropriate types of property to meet modern requirements. Property with these characteristics is in limited supply in the less developed CEE countries and could slow the number of companies looking to migrate eastwards.
An issue which may affect the way logistics operators occupy space is the introduction of new international accounting standards (IAS). IAS are to be adopted by all publicly-listed European companies from 2005, but comparative accounts will need to be prepared for the previous year – 2004 – in accordance with IAS.
As part of IAS there will be changes in the way companies account for property on their balance sheets and profit and loss statements. The most significant changes to be felt will affect the way leases are recorded and the valuation of owner-occupied and investment property.
With regards to logistics operators and their property decisions, contract-backed property commitments are expected to become more important to ensure that rent payable on property to which the operator has committed in order to service particular clients is matched by inflow of revenue from those clients.
Similarly, property may be shifted back to the client where the operator may be unwilling to take on the risk associated with the property commitment. In these cases, the property may be moved back to the clients’ accounts with the client either owning the property or taking out the lease on the facility instead of the operator.
On the whole, the industrial sector continues to be less volatile than other sectors because of the high concentration of owner occupation and built-tosuit lettings. As a result rents are not expected to rise significantly in 2004 with the market continuing to remain stable in the short term. It will, however, be interesting to see what impact the expansion of the EU will have on the logistics market in May 2004.
DTZ Research is about to launch a major study of European logistics markets including sector trends, locational analysis, transport issues and property markets. For further information please contact Asli Ball on Tel: +44 20 7757 6668. Simon Lloyd is a director of Industrial Agency, DTZ Debenham Tie Leung