Withreference to real estate economics, demonstrate through the medium of a casestudy how an applied understanding of economics is essential to performingsuccessfully within the real estate sector. Real estate represents ahuge proportion of wealth across the world, however land and property arescarce resources therefore making it of capital importance that their usage isefficient as possible. Real estate economics involves the crucial distributionof these restricted factors of production in an economy where their demand isalmost infinite. Due to ever changing consumer behaviour and spending thelogistics sector within real estate is booming. This will be a key focus andcase study for the following essay, with the London logistics and industrialproperty sector as a focal point. As stated in the Cushman& Wakefield industrial market snapshot from the third quarter of 2017, thedemand for modern logistics space is continuing to outstrip the supplyavailable in many regions. Industrial property has consistently outperformedother commercial property sectors over the year, with the annual return forindustrial 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 of7.7% and 6.8% according to MSCI data. (Cushman & Wakefield, 2017) Source: MSC/IDP, September 2017 1 Figures produced by theDepartment for Transport showed that residents in London spend 46 minutes onaverage a day commuting to and from work on buses, trains, tubes and trams withit becoming an increasingly common opportunity to shop online. Shopping onlineincreased from 3% in 2007 to 15% in 2016 of total retail sales and is expectedto reach 23% by 2020 (Office for National Statistics).
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This has led to a huge increase in demand for warehouse space in the recentyears. Now, with the amplified opportunity to shop on the way to work, it canbe expected that greater numbers of spending at peak commuting times will occur;with these commuters constantly demanding faster delivery service. As a resultof these changes in consumer behaviour it is essential that logistics andindustrial warehouses can be closer to where the customer is demanding theproduct.
Economics studies consumer behaviour regarding theallocation of the finite resources, there are several ways of allocatingresources, they are: The Market Economy, The Command/ Centrally Planned Economyand The Mixed Economy. The free market economy is a system in which allprices for goods and/or services are determined by the consumer and the actualmarket. In this case forces of supply and demand are free from governmentintervention in terms of price setting or authority intervention. This is aneconomic system where prices are constantly changing to reflect the changes inconsumer supply and demand. Problems with the free market economy is that itcan lead to instability in a market and the economy due to inadequate vitalservices with no public goods. Health care and education services would beprivate meaning that economically poorer people could suffer from lack ofservices and general inequality.
A free market economy can also allow formonopolies to materialise. In terms of real estate and the market for industrial/logisticsproperty, it is likely that similar behaviours to those in London currentlycould be expected. With the consumers demands having the freedom to changewhenever, it would be crucial that the demand can be met quickly in correctsupply so that business does not fail. Vast warehouse and logistics space wouldbe probable, especially in the South of the UK around London. The command economy or centrally planned economy isan economic system where the government determines goods that will be producedas well as how much of these goods should be produced and for what price theyshould be offered for. This is often a key feature of a communist society. Inthis economic system, there is no competition between businesses as the centralgovernment controls all business. In a command economy, wages jobs and as aresult unemployment rates are all controlled by the government as they see fit.
Common goods and services can be provided without the concerns of profit andloss and in common economies of today, free universal health care coverage isavailable to citizens e.g. Cuba. In a centrally planned government, there isoften motivation to find the right mix as it allows the opportunity for directresource distribution to areas of need and in theory allows for less inequality.In this economy, the lack of competition can be found to obstruct innovationand creativity limiting advancements within sectors such as medicine andtechnology.
Centrally planned economies often find a lack of efficiency. Thedemand for logistics and warehouse space would likely be minimal in a commandeconomy as government will have decided the goods and services available and inthe quantity, they should be available in. The mixed economy is a system that combinescharacteristics from both the centrally controlled economy and the free marketin order to create a balance. The mixed economy allows the free market andrules of supply of demand to determine prices. In this economy characteristicsof the command economy come into action within areas such as healthcare,international trade and transportation and roles within the military.
Thisallows the government to safeguard the people and market. The mixed economyminimises the issues that come with a free market economy and the areas thatare often neglected within the free market economy. The mixed economy still hasissues with unemployment however and in contrast can sometimes still have toomuch control over some sectors.
The mixed market economy has allowed forconsumer behaviour at its current, internet has only really been available tothe consumer in the past 20 years and the last 10 years have delivered a hugeleap in advancements. The office for national statistics found that in2015-2016, 88% of all households in the UK had an internet connection and 95%of households owned a mobile phone leading to the expectation that leisurespending will very likely drive the demand for new industrial and logistic useproperty. (Jones Lang LaSalle, 2017) Thefree and mixed markets economy see the theory of supply and demand come to passalong with the concept of equilibrium.
The systems allow for relative pricesfor products to constantly change to reflect change in the supply and demandfor these goods and services. (Myers, 2017) The demand refers tohow 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 offerthe consumer. The correlation between price and quantity demanded is referredto as the demand relationship, the correlation between the price of the goodand 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 acrossthe UK continue to illustrate a shortage in class A logistics space and ase-commerce continues to expand, retailers also are expanding and requirefurther space to optimise their online sales distribution channels. Onlineretailers such as amazon have grown enormously in recent years and in 2016Amazon accounted for more than a quarter of warehousing that was let. Amazonhave also introduced the Prime Now service that promises one to two-hourdelivery leading to more space being required in even more places than ever. (Curry, 2016) However, it appearsthat demand is squeezing supply, as available industrial space is declining.Traditionally the need for this space has predominantly been to replenish the stockin shops.
Storage space back of house is often minimised so that selling spacecan be increased. (Jones Lang LaSalle, 2017) Like the demand forspace in industrial and logistics space is rising, so is the demand for housingin and around London. Simon Pursey, head of UK Investment at Segro said “The need for new homes in cities, likeLondon, is placing huge pressure on industrial land to be released forresidential development. This is forcing industrial occupiers and last milefulfilment operators to relocate further from their customer base, despite thedemand for their goods and services increasing. It is essential we provide arobust and flexible urban logistics infrastructure to halt the loss ofindustrial land and provide the right environment for the sector to thrive.” With the demand remaininghigh but the supply for this industrial space at a slow rise, online operationswill be unable to expand as much of the warehouse space will be in maximumoutput.
Alternatively, creating more industrial property space further awaythan the epicentre for demand will ultimately force delivery charges to beincreased to meet costs of travelling to the customer base. High deliverycharges are not something that consumers have not been prepared to payresulting in the customer’s choice and value potentially altering again. The Circular flow of income isan economic model showing how money flows throughout an economy.
The modelworks around the movement of income between firms and households through thepurchase of goods and services. Firms produce goods and services and throughthis wages are generated 1 Graphshowing total return on standard industrial, distribution warehouses, retailand office property from quarter 1 of 2016 to quarter 3 of 2017. Drop in Q2 of2016 through to Q4 of 2016 likely representative of uncertainty in marketfollowing Brexit.