21 Mar 2018
A heady cocktail of structural change, tight levels of supply and increased confidence vis-a-vis other sectors is fuelling insatiable investor demand for industrial and logistics, according to the 2018 Industrial and Logistics Market Report, published today by national commercial property consultancy Lambert Smith Hampton (LSH).
Investment market at full throttle
In the space of a few years, industrial and logistics has gone from being the ‘Steady Eddy' of UK property to asset class of choice, capped in 2017 by record annual volume of £7.5bn, a renewed bout of yield compression and sector-leading annual returns of 19.6%. 2018 has picked up where 2017 left off, with stock of varying size and quality changing hands across all parts of the market.
Volume-wise, no individual sub-sector really stood out in 2017. Distribution warehouses (£3.8bn) and South East industrial estates (£1.4bn) both saw record volume, while rest of UK estates volume of £2.4bn was far ahead of anything seen over the past ten years. 2017 was also remarkable for the sheer depth of investment demand; the year saw 540 separate deals, up 51% on 2016 and 39% above the previous record year for volume in 2014.
Occupier markets unfazed by Brexit uncertainty
Judging by market activity in 2017, occupiers appear to have been indifferent to the uncertainty posed by Brexit. The report, which examines activity across the whole market, reveals that UK-wide take-up was relatively respectable in 2017, standing at 96.2m sq ft and falling only 2% short of the five year annual average.
In a reversal of 2016's pattern, mid box (50,000 sq ft to 99,999 sq ft) was 2017's star performer, recording its second strongest year of take-up on record behind 2015. Meanwhile, activity in the small and medium-sized sectors was relatively consistent, improving 5% on 2016 and exactly in line with the five-year average
In contrast, logistics (100,000 sq ft +) take-up fell by 31% from 2016's record level and was 7% below the average. Notably, however, if Amazon's 2016 exploits in the market are overlooked, there was little to separate 2017 from 2016.
Reassuringly for developers, appetite for quality facilities also showed little sign of abating, with grade A space accounting for 30% of UK take-up, the second highest proportion on record after 2016. While rising from a low base, particularly notable was the increase in grade A take-up at the smaller end of the market, trebling in just two years to 8.7m sq ft.
Tight supply fuels continuing rental growth
UK-wide supply fell for a seventh successive year, leaving the UK availability rate at a new all time low of 4.4%. However, the fact supply fell by 3% compared with double-digit percentage falls in previous years is a sign that a degree of equilibrium is returning to some parts of the market, albeit confined to particular size-bands and regions.
With supply remaining tight, momentum in rental growth was maintained during 2017. Prime rents across the UK's 60 key markets increasing by 4.9% on average, while some locations have seen exceptional growth over the past two years, especially in London and the South East. Enfield saw the sharpest increase of any market in 2017, with prime rents rising by 22% year-on-year.
Renewed vigour for speculative development
The fundamentals in the market continue to make a compelling case for speculative development. LSH anticipates at least 7.3m sq ft worth of units above 50,000 sq ft will come forward speculatively across the UK in 2018, compared with only 5.9m sq ft of speculative starts in 2017. Meanwhile, reflecting renewed fund interest in multi-let investments, development has picked up significantly at the smaller end of the market, with 3.2m sq ft of development in the medium sized bracket at the end of 2017, equal to that of logistics.
Commenting, Oliver du Sautoy, Head of Research at Lambert Smith Hampton, said: "From Elon Musk's driverless truck to subterranean warehouse concepts, a sector once regarded as relatively uninspiring has now captured the wider imagination. Advances in communications technology and increasing automation are steadily redefining both how we produce and consume, and the industrial & logistics sector is arguably at the fulcrum of this profound structural change.
"Even if the fundamentals around the sector remain extremely positive, 2018 is set to be challenging in some respects. In the core markets, investors and developers are finding value increasingly harder to come by, while occupiers in search of more flexible, economical solutions are finding themselves either very restricted on options or priced out into secondary locations".
Alex Carr, Director of Industrial Capital Markets, said:
"Considering the price increases we saw and the volume of assets traded, 2017 was nothing short of spectacular. While a degree of further yield compression cannot be ruled out, much of the rationale for investment is predicated on rental growth continuing to feed through. Although many assets are perceived to be highly reversionary, investors should be diligent over their aspirations on future growth.
"There are undoubtedly pockets of opportunity to exploit over the coming years. For those seeking asset management angles, we expect a strong focus of demand on obsolete but well-located stock, while areas in close proximity or benefitting from planned road infrastructure improvements will be of interest to development funders"