With demand for modern logistics space is continuing

 

With
reference to real estate economics, demonstrate through the medium of a case
study how an applied understanding of economics is essential to performing
successfully within the real estate sector.

 

 

Real estate represents a
huge proportion of wealth across the world, however land and property are
scarce resources therefore making it of capital importance that their usage is
efficient as possible. Real estate economics involves the crucial distribution
of these restricted factors of production in an economy where their demand is
almost infinite.      

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            Due to ever changing consumer behaviour and spending the
logistics sector within real estate is booming. This will be a key focus and
case study for the following essay, with the London logistics and industrial
property sector as a focal point.

As stated in the Cushman
& Wakefield industrial market snapshot from the third quarter of 2017, the
demand for modern logistics space is continuing to outstrip the supply
available in many regions. Industrial property has consistently outperformed
other commercial property sectors over the year, with the annual return for
industrial and distribution warehouses across the UK rising by 16.8% and 14.7%
placing the sector well ahead offices and retail which provided a return of
7.7% and 6.8% according to MSCI data. (Cushman & Wakefield,
2017)

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: MSC/IDP, September 2017 1

 

Figures produced by the
Department for Transport showed that residents in London spend 46 minutes on
average a day commuting to and from work on buses, trains, tubes and trams with
it becoming an increasingly common opportunity to shop online. Shopping online
increased from 3% in 2007 to 15% in 2016 of total retail sales and is expected
to reach 23% by 2020 (Office for National
Statistics).
This has led to a huge increase in demand for warehouse space in the recent
years. Now, with the amplified opportunity to shop on the way to work, it can
be expected that greater numbers of spending at peak commuting times will occur;
with these commuters constantly demanding faster delivery service. As a result
of these changes in consumer behaviour it is essential that logistics and
industrial warehouses can be closer to where the customer is demanding the
product.

            Economics studies consumer behaviour regarding the
allocation of the finite resources, there are several ways of allocating
resources, they are: The Market Economy, The Command/ Centrally Planned Economy
and The Mixed Economy.

            The free market economy is a system in which all
prices for goods and/or services are determined by the consumer and the actual
market. In this case forces of supply and demand are free from government
intervention in terms of price setting or authority intervention. This is an
economic system where prices are constantly changing to reflect the changes in
consumer supply and demand. Problems with the free market economy is that it
can lead to instability in a market and the economy due to inadequate vital
services with no public goods. Health care and education services would be
private meaning that economically poorer people could suffer from lack of
services and general inequality. A free market economy can also allow for
monopolies to materialise. In terms of real estate and the market for industrial/logistics
property, it is likely that similar behaviours to those in London currently
could be expected. With the consumers demands having the freedom to change
whenever, it would be crucial that the demand can be met quickly in correct
supply so that business does not fail. Vast warehouse and logistics space would
be probable, especially in the South of the UK around London.

            The command economy or centrally planned economy is
an economic system where the government determines goods that will be produced
as well as how much of these goods should be produced and for what price they
should be offered for. This is often a key feature of a communist society. In
this economic system, there is no competition between businesses as the central
government controls all business. In a command economy, wages jobs and as a
result unemployment rates are all controlled by the government as they see fit.
Common goods and services can be provided without the concerns of profit and
loss and in common economies of today, free universal health care coverage is
available to citizens e.g. Cuba. In a centrally planned government, there is
often motivation to find the right mix as it allows the opportunity for direct
resource distribution to areas of need and in theory allows for less inequality.
In this economy, the lack of competition can be found to obstruct innovation
and creativity limiting advancements within sectors such as medicine and
technology. Centrally planned economies often find a lack of efficiency. The
demand for logistics and warehouse space would likely be minimal in a command
economy as government will have decided the goods and services available and in
the quantity, they should be available in.

            The mixed economy is a system that combines
characteristics from both the centrally controlled economy and the free market
in order to create a balance. The mixed economy allows the free market and
rules of supply of demand to determine prices. In this economy characteristics
of the command economy come into action within areas such as healthcare,
international trade and transportation and roles within the military. This
allows the government to safeguard the people and market. The mixed economy
minimises the issues that come with a free market economy and the areas that
are often neglected within the free market economy. The mixed economy still has
issues with unemployment however and in contrast can sometimes still have too
much control over some sectors. The mixed market economy has allowed for
consumer behaviour at its current, internet has only really been available to
the consumer in the past 20 years and the last 10 years have delivered a huge
leap in advancements. The office for national statistics found that in
2015-2016, 88% of all households in the UK had an internet connection and 95%
of households owned a mobile phone leading to the expectation that leisure
spending will very likely drive the demand for new industrial and logistic use
property. (Jones Lang LaSalle, 2017)

            The
free and mixed markets economy see the theory of supply and demand come to pass
along with the concept of equilibrium. The systems allow for relative prices
for products to constantly change to reflect change in the supply and demand
for these goods and services. (Myers, 2017) The demand refers to
how much or the quantity of a product or service is desired by the consumer,
supply represents how much of the goods or services the market has, to offer
the consumer. The correlation between price and quantity demanded is referred
to as the demand relationship, the correlation between the price of the good
and service and how much is supplied is referred to as the supply relationship.
Consequently, price reflects the consumers supply and demand. (Hayes, n.d.) Most regions across
the UK continue to illustrate a shortage in class A logistics space and as
e-commerce continues to expand, retailers also are expanding and require
further space to optimise their online sales distribution channels. Online
retailers such as amazon have grown enormously in recent years and in 2016
Amazon accounted for more than a quarter of warehousing that was let. Amazon
have also introduced the Prime Now service that promises one to two-hour
delivery leading to more space being required in even more places than ever. (Curry, 2016) However, it appears
that demand is squeezing supply, as available industrial space is declining.
Traditionally the need for this space has predominantly been to replenish the stock
in shops. Storage space back of house is often minimised so that selling space
can be increased. (Jones Lang LaSalle, 2017) Like the demand for
space in industrial and logistics space is rising, so is the demand for housing
in and around London. Simon Pursey, head of UK Investment at Segro said “The need for new homes in cities, like
London, is placing huge pressure on industrial land to be released for
residential development. This is forcing industrial occupiers and last mile
fulfilment operators to relocate further from their customer base, despite the
demand for their goods and services increasing. It is essential we provide a
robust and flexible urban logistics infrastructure to halt the loss of
industrial land and provide the right environment for the sector to thrive.”
            With the demand remaining
high but the supply for this industrial space at a slow rise, online operations
will be unable to expand as much of the warehouse space will be in maximum
output. Alternatively, creating more industrial property space further away
than the epicentre for demand will ultimately force delivery charges to be
increased to meet costs of travelling to the customer base. High delivery
charges are not something that consumers have not been prepared to pay
resulting in the customer’s choice and value potentially altering again.
            The Circular flow of income is
an economic model showing how money flows throughout an economy. The model
works around the movement of income between firms and households through the
purchase of goods and services. Firms produce goods and services and through
this wages are generated

1 Graph
showing total return on standard industrial, distribution warehouses, retail
and office property from quarter 1 of 2016 to quarter 3 of 2017. Drop in Q2 of
2016 through to Q4 of 2016 likely representative of uncertainty in market
following Brexit.