Demand for industrial space stalls during a ‘subdued’ Q2 2011

The manufacturing sector continued to drive take-up of industrial space in Q2 2011 although demand for big sheds fell slightly, according to DTZ Research’s Property Times UK Industrial report, which covers the market for properties over 50,000 sq ft.

Take-up levels fell from 6.9m sq ft in Q1 to 5.6m sq ft in Q2 in response to the unfolding Greek sovereign debt crisis with many occupiers putting decisions on hold. The report revealed that market activity did return towards the end of the quarter as market fears of a disorderly default subsided. A large volume of take-up is expected for Q3 as pent up demand is satisfied.

Favourable exchange rates have improved the competitiveness of UK-based manufacturing and Q2 saw a number of deals driven by business expansion in the sector. As a result, the profile of occupiers changed considerably with fewer large distribution deals taking place and the manufacturing sector accounting for an increasing proportion of demand. During 2010 manufacturing accounted for 21% of take-up, this has increased dramatically during the first half of 2011 with manufacturing driving 39% of letting activity.

Growth in the automotive sector helped to boost demand in both the North East and West Midlands with Nissan and Jaguar Land Rover initiating an expansion of their production facilities.

DTZ’s report also found that speculative development continues to remain limited. The subsequent shortage of grade A space is leading many occupiers to resort to built-to-suit projects, particularly for projects over 100,000 sq ft.

There was little change in rental outlook with industrial rents continuing to lag behind both office and retail property in the rental cycle. However, industrial property is the only sector expected to experience accelerated rental growth over the next five years as the delayed recovery begins. Investment levels also fell during the quarter despite reports of growing interest in industrial property as an asset class as investors begin to target income.

Take-up levels in Wales were buoyed in Q2 by the sale of the former Bosch factory in Miskin to medical tool manufacturer, Renishaw, which was sold for owner occupation. Take-up levels reached 593,977 sq ft with demand from the manufacturing sector continuing to grow.

Robert Ladd, Director at DTZ in Cardiff, commented: “Enquiry and transaction levels at the beginning of Q2 appeared to have been influenced more by the Bank holidays rather than being reflective of major changes in demand levels for larger buildings. Going forward, although an increase in enquiries is encouraging, take-up is likely to be impacted by the increasingly limited amount of grade A buildings available for immediate occupation. With little sign of any new accommodation being developed speculatively in the foreseeable future this could pose a real problem for Wales in encouraging companies to either expand or set-up in the Principality.”