Industrial & logistics sector continues to break records as investment volumes top £4.7billion in 2020

According to Savills latest Big Shed Briefing, investment volumes for distribution warehouses reached £4.7 billion in 2020, a 25% increase on 2019 figures and £500m higher than the previous watermark of £4.2 billion set in 2014. This is despite the fact capital markets all but ceased at the height of the initial Covid-19 lockdown.

In relation to the pandemic, Savills notes that 76% of all capital was deployed in the second half of the year once trading could resume in a Covid-secure manner. Whilst there were a number of notable single building transactions, the market was dominated by portfolio purchases, accounting for 44% of all sales. In fact, 2020 saw the largest industrial deal in UK history (excluding corporate sales such as the purchase of Logicor by CIC), which saw Blackstone pay £473 million for the Platform portfolio, a collection of assets sold by Prologis following the acquisition of Liberty.

Savills has also seen a change in purchaser profile, with overseas investors accounting for 52% of transactions, equalling 2017 as the joint highest proportion ever recorded. Consequently, UK institutions accounted for just 18% of trades, down from 21% in 2019. However, in absolute terms, UK institutions still traded just over £1 billion worth of stock, which is broadly in line with the past four years.

Tom Scott, director in the industrial investment team at Savills, comments: “The supply and demand dynamics of the occupier market will continue to drive competition for the best assets, which in turn will generate strong investment volumes in to 2021. We will also continue to see downward pressure on yields, which with the sheer weight of capital and sentiment surrounding the market now stand at 3.75% for both distribution warehouses and multi-let estates.”

The occupier market also saw record levels of take-up (for units of 100,000 sq ft+), hitting 50.1 million sq ft (4.654 mllion sq m) in 2020. As part of this, Savills saw more than 10 million sq ft (929,030 sq m) of take-up for speculative units, the most amount of new space ever taken. This has driven the amount of available Grade A space to 12.99 million sq ft (1.206 million sq m), which equates to just 0.45 years of supply.

In contrast, there remains as much as 19 million sq ft (1.765 million sq m) of poorer quality stock currently on the market, equating to more than 3.7 years of Grade C supply. This suggests that occupiers are increasingly interested in only the best quality buildings.

Savills is currently tracking 8.19 million sq ft (760,875 sq m) of speculative development due to PC in 2021, which given recent take-up levels will largely maintain supply and vacancy at their current levels. The firm suggests that as investors face growing competition to acquire existing income producing assets, a larger number may start to consider forward funding speculative development as a means to gain entry to the market.

Kevin Mofid, head of industrial research at Savills, adds: “The lack of Grade A stock in the occupational market, coupled with the lack of opportunities for investors to purchase prime assets could spell a change of thinking in 2021. We believe that investors should start to consider edging further up the risk curve, forward funding spec as a way to access the market at a discount. However, it is imperative that what is built provides the right size building in the right location with no design compromises, which will perhaps mean a rethink of old institutional standards.”