According to Savills latest Big Shed Briefing, total sales volumes in the UK warehouse market (units of 100,000 sq ft +) hit £2.3 billion in H1 2017, almost £1 billion higher than the same period in 2016 and 150% up on the long term average. This significant activity is attributed to the ongoing popularity of industrial property as an asset class as it continues to generate attractive returns underpinned by a consistently robust occupier market.
Notable deals in the first half of 2017 include Project Apple, which saw CBRE Global Investment Partners invest £310 million into an investment and development joint venture (JV) with Prologis. In addition, SEGRO acquired the other 50% of the Airport Property Partnership from its JV with Aviva, whilst Oxenwood completed its acquisition of the Ultrabox Portfolio for £286m in a JV with AIMCo of Canada. IM properties sale of the 699,983 sq ft (65,030 sq m) Sainsbury’s distribution Centre at Hams Hall in the West Midlands signified the largest single unit deal so far this year. The warehouse was acquired by Far Eastern clients of KFIM for £98.5 million, reflecting a net initial yield of 4.9%.
Savills notes that whilst transaction volumes are up, the number of deals has actually fallen year on year due to the constrained availability of stock. 77 deals were recorded in the first half of 2017 compared with 116 for the same time period in 2016. This is partly due to large scale owners continuing to hold stock rather than trade in order to build up their own portfolios.
Savills prime yields remain unchanged at 5%, however they anticipate that as demand stays high and stock low, there is likely to be continued downward pressure on this figure with strong prospects of an inward yield shift during the second half of the year.
James Williams, director in the industrial investment team at Savills, comments: “Given the continued appetite of investors to deploy capital into the sector, we anticipate buoyant investor demand to continue. Investment volumes could be tempered by constrained supply however this will maintain the downwards pressure on yields.”
After a record 2016, the occupational market has been slightly more subdued in the first half of the year with take-up reaching 11.8 million sq ft (1.096 million sq m), a fall of 4.2 million sq ft (390,192 sq m) on 2016, but still ahead of the 10-year average. Savills believes this is due to the ongoing political uncertainty surrounding Brexit and the recent general election, along with rising inflation impacting the consumer market, which in turn is seeing retailers adopt a wait and see attitude to their supply chains.
Whilst transaction levels have fallen, there still remains a significant lack of good quality stock across the UK. So far during 2017 only 1.5 million sq ft (139,354 sq m) has been delivered to the market with a further 3.6 million sq ft (334,451 sq m) currently under construction and due for delivery in the latter half of 2017 and 2018. Savills predicts that latent demand should see take-up levels increase into the second half of the year, taking care of any excess supply, particularly of Grade A units.
Richard Sullivan, national head of industrial & logistics at Savills, adds: “Whilst overall figures are down, the West Midlands for example, has seen take-up levels increase by as much as 58% since H1 2016, with the first half of 2017 proving its best year on record. Furthermore, key drivers in the occupational market, such as the growth of online retail, shows no signs of abating and will continue to fuel activity. Ultimately, development remains constrained with supply levels still way below any previous peak and for this reason we are confident in the ongoing strength of the industrial and logistics sector.”