Pension reforms and rising occupier costs: Exploring the impacts on the logistics sector
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Pension reforms could boost investment
The Mansion House pension reforms aim to pool the assets of 86 local authority pension funds in England and Wales into eight larger, consolidated funds, by March 2026. There are also plans to consolidate Defined Contribution (DC) Pension Schemes into larger funds, with a target date of 2030.
The shift towards pooled pension funds (megafunds) means larger allocations and, with improved economies of scale and investment capabilities, these funds are expected to allocate more capital to alternative assets, such as real estate.
Logistics and industrial assets appeal to annuity funds as they tend to be on longer leases, offer robust rental growth, and are low maintenance (relative to other real estate assets). These investors are risk-averse, prioritising predictable income over the potential for higher returns, and are likely to focus on larger, existing assets (rather than development), that offer secure long-term income.
Logistics real estate could therefore prove to be a prime beneficiary of these reforms. Providing stable, inflation-linked rental income, with long-term leases (10-20 years) underpinned by blue-chip tenants (e.g., Amazon, DHL, Tesco), it can offer predictable cash flows and thus, aligns well with pension funds’ investment objectives.
Pension schemes must assess their carbon footprint for Task Force on Climate-Related Financial Disclosures (TCFD) reporting. Their focus, therefore, will be on sustainable assets, and buildings with strong sustainability credentials will prove attractive.
Larger pension funds may secure better financing deals, reducing capital costs. This could drive increased competition and improved pricing for sustainable, core assets.
Amazon returns
Amazon reported strong results in the fourth quarter of 2024, with net sales up 10% year-on-year. Projections for Q1 2025 are also positive, with net sales expected to rise 5-9% year-on-year, despite the negative impact of currency movements.
Amazon has signalled its confidence in future growth, acquiring additional space in the US, committing to new build-to-suit facilities in the UK, they also have various live requirements, particularly for parcel delivery hubs.
It’s unlikely that Amazon will come to dominate the market in terms of take up, in quite the same fashion they did in pre-pandemic years as they have largely built out their distribution network. However, with a number of parcel delivery hub requirements, their appetite for further expansion is clear.
Occupiers face rising cost pressures
Rental growth has slowed in recent quarters but remains buoyant. Average rents have risen 5.4% over the year to January 2025.
As well as rising rents, occupiers face rising employment costs. A 6.7% rise in the minimum wage (for employees over 21 years old) will come into effect in April 2025, elevating employment costs and impacting profit margins, especially for businesses reliant on low-paid staff.
Also in April, occupiers will face increased National Insurance Contributions (NICs), as the earnings threshold that triggers employers’ NICs is set to be reduced from £9,100 to £5,000, with the rate increasing from 13.8% to 15%.
Business rates are also rising. The standard multiplier will increase in April 2025 from 54.6% to 55.5%. The next rates revaluation is scheduled for 1 April 2026, with assessments based on property values as of 1 April 2024. Between April 2021 (the valuation date for the previous revaluation in April 2023) and April 2024, average industrial rents across the UK have increased by 29%, although the rate of growth varies by region. Rents in London have recorded average growth of 37%, compared with 18% in Wales and 20% in the South West. This substantial rental growth will increase rateable values for the sector; however, a reduction in the multiplier (expected to be announced in the 2025 Budget) may offer some relief.
Growing appeal of Freeports and Investment zones
Facing rising tax burdens, occupiers could mitigate some of the rising cost burden by locating in a Freeport (tax zone) or investment zone, benefiting from zero or reduced business rates and national insurance contributions.
As the tax burden on businesses rises, the benefits of locating in these zones are increasing. Over a three-year period, a business could save £8,998 per (new) employee. This is £2,415 more than the incentive offered when Freeports were introduced.
The increasing burden of business rates means that, for a business paying rents that have grown in line with the UK average, the incentives offered by Freeports are now around 50% more advantageous (over a five-year period) than when they were first announced.
However, not all of these benefits may be passed on to the tenant. Service charges, levies, or rental premiums may apply to businesses operating in these zones.
Rising labour costs fuel appetite for automation
Investment in automation could help reduce reliance on low-paid labour and improve productivity. The logistics sector is increasingly adopting automation to enhance efficiency, and rising labour costs will further incentivise operators to invest in this technology.
Some automation equipment providers have reported a decline in sales following the pandemic, with the dip in online sales prompting a pullback in capital expenditure related to online order fulfilment. However, this trend appears to be reversing. Rockwell Automation reported a 10% increase in new orders year-over-year, driven by strategic investments from the e-commerce and parcel-handling sectors. Amazon, one of the world’s largest users of industrial robots, has announced plans to scale up its automation efforts, with significant investments in robotics and AI scheduled for this year.