Industrial & Logistics sector set for further prime yield compression in 2021

Len Rosso, Head of Industrial & Logistics for Colliers International.

The Industrial & Logistics sector is poised to be the main recipient of the huge weight of capital earmarked for real estate in 2021, as the record-breaking asset class of last year continues to offer robust income security, strong reversionary potential and returns for investors.

“The industrial sector out-performed all other asset classes in terms of rental growth in 2020, and these prospects look set to continue as we look ahead to 2021,” said Andrea Ferranti, Head of Industrial & Logistics Research at Colliers. “We are expecting new overseas entrants to chase industrial assets, while established UK investors will be keen to further increase their portfolio weighting towards industrial, as the sector continues to offer the most security, rental growth and returns.”

However, according to Colliers International’s UK Industrial & Logistics experts, there is little industrial stock being made available for investment opportunities and a lot of competition from already-established investors, so it will be difficult for new investors to enter the market. This competitive market place is driving prices up and resulting in further yield compression, particularly in London and the South East.

Len Rosso, Head of Industrial & Logistics at Colliers International, said: “Despite lockdowns and localised restrictions, there remains a strong appetite for prime industrial assets, both multi-let and single-let distribution warehouses. 2020’s annual investment volumes topped £9.4 billion (up 21% y/y), driven by the strongest quarterly activity in on record at £4.9 billion in Q4. Industrial investment accounted for a record 21% share of total investment volumes, and we don’t expect this to change drastically in 2021.”

The market continues to see strong demand for Grade A space and rental growth is expected to remain positive in 2021, due to strong absorption of speculative space and vacancy rates just shy of 6%. Take-up for design & build distribution warehouses accounted for 49% of overall total take-up in 2020, with 21% of leasing activity witnessed for speculatively built space – equating to 8 million sq ft of new supply. Colliers expects a similar or higher volume of new space to be constructed in 2021.

Rosso continues: “Take up for large distribution warehouses (100,000 sq ft+) in 2020 was fuelled by demand from 3PLs and e-commerce. This has caused some concerns in the market that a drop in consumer confidence, due to a pandemic-induced economic malaise, could negatively affect demand for industrial space over the next 12 months. However, based on current occupier requirements and the continuing shift towards online purchasing, Colliers believes take-up activity will remain in line with, if not in excess of the 5 year average (2015-19) of 30 million sq ft in 2021.”

In Colliers’ latest Industrial & Logistics Market Update webinar, which was attended by over 600 industry professionals, attendees took part in a poll where 66% (out of 280 respondents) said they thought it unlikely that a drop in consumer confidence, due to the pandemic, would affect industrial take-up activity in 2021. When asked how long the boom times for industrial can last, 81% said they expected this buoyancy to remain throughout 2021 and beyond. Furthermore, 58% of respondents stated that yields will remain unchanged, while 34% expected further yield compression in 2021.