How serious is the UK’s supply chain crisis?

COMMENT The supply chain crisis is a global phenomenon triggered by the pandemic and worker shortages in several key industrial sectors. But it has been more acutely felt in the UK due to the additional disruption caused by Brexit. The knock-on effect on the real estate market is already being seen. There are around 100,000 HGV driver vacancies in the UK, meaning one in six driver jobs are unfilled. While the pandemic is partly to blame, the Brexit-related exodus of European workers is undoubtedly the main culprit. Labour shortages are so bad in some sectors that companies are offering joining bonuses to potential workers – both AO.com and Pets at Home, for example, are offering £1,000 signing on bonuses to new warehouse workers. Snapping up space As a result of supply chain staff shortages, major retailers’ stock levels are at their lowest since 1983, according to the CBI – awful timing for retailers as we move closer to Black Friday and the crucial Christmas trading period. Grocers have been hit hardest by supply chain shortages, as well as wholesale suppliers of building materials, household goods and office machinery. Restaurants have also been hit – McDonald’s was forced to take milkshakes and bottled drinks off its menus, and Nando’s temporarily closed 45 outlets because of a shortage of chicken wings. This is despite no shortage of produce from UK farms – it is due to a lack of lorry drivers, warehouse staff, staff in retail distribution centres, and in supermarkets to put products on shelves. As a direct consequence of this crisis, retailers are desperately seeking to secure additional warehouse space – with the goal of substantially increasing inventory to maintain supply to customers. About 13m sq ft of warehouse lettings were transacted nationwide in the past three months, compared with 15.8m sq ft across 2020 as a whole. Major retailers such as John Lewis and Asos are among those taking new space. Despite significantly higher cost of acquisition, 660,000 sq ft of these lettings were in London, highlighting increased demand for last-mile logistics capability. Availability of warehouse space is at the lowest level ever recorded, and logistics property companies such as Prologis and M7 are now looking to acquire retail parks with a view to partial or full conversion of these into warehousing, given historically low industrial yields versus relatively high retail yields. Breaking point As this additional warehouse space comes into play, this crisis should hopefully not be a prolonged one. Increased warehouse automation and a subsequent reduction of reliance on human labour should help, as will recent government moves to ease supply chain pressures. In fact, there is some evidence that peak disruption is behind us with Chinese manufacturing and freight starting to move again. Shipping cost indices such as the Shanghai Containerised Freight Index and the Freightos Baltic Index recently declined slightly following 20 conservative weeks of growth, so the movement of goods is slowly improving. But the crisis will certainly impact retailers in the run-up to Christmas at a time when they can ill afford it. Loss of revenue, in addition to rising costs, will impact profitability considerably and, from a landlord perspective, will likely mean increased rental default. We could potentially even see a further extension to the rent moratorium due to expire in March 2022. With retail rent collection still lagging about 15% behind other property sectors, according to Re-Leased data, this could well tip some particularly debt-laden landlords over the edge. As if this wasn’t bad enough, the pace of growth in Covid cases is very worrying. From a retail perspective, the sector could really do without another lockdown this close to Christmas. Any reintroduction of restrictions would further impact consumer confidence, which is already fragile as a result of the supply chain crisis. Retail is once again facing a perfect storm – this one a relatively short, sharp one – but potentially no less impactful, given the importance of Christmas 2021 to the sector. Jonathan De Mello, equity partner, CWM Retail