Industrial is property sector’s ‘big winner’

(left to right): James Mottram (Lodders), Charles Binks (Knight Frank), Mark Miller and Alastair Frew (both Lodders) Claire Williams (Knight Frank), Lee McBride (Lodders). Photo credit: Dave Warren/Picture Team

Economic conditions and Covid have driven historic big wins for the UK’s industrial property sector in recent times, but real estate experts are warning that it will now face volatility and head winds from supply chain efficiencies, as well as materials and labour shortages.

Speaking at law firm Lodders’ Annual Property Conference, David Sleath, chief executive of FTSE 100-listed industrial developer REIT Segro said: “Industrial property outperformed the office sector across Europe for the first time last year. In part, this has been fuelled by increased demand for ‘big box’ warehouses and ‘last touch’ urban warehouses, as new users of industrial space continued to emerge alongside the spike in ecommerce as a result of retail sales activity moving online.

“This fast-paced growth continues, and more is set to come thanks to the market dynamics of the industrial sector being exceptionally strong in 2022.”

Head of Lodders’ Real Estate Group Mark Miller agreed: “The industrial sector has been the big winner in the changing world,” he said in his opening address.

“There are plenty of cash-rich and hungry buyers seeking opportunities to grow rents and values in the industrial sector, as well as owner occupiers looking for space. Arguably, interest and demand have never been greater with global capital competing with UK funds for limited available stock.

“In particular, modern distribution warehouses are highly prized by investors because of strong tenant demand, and limited availability and supply, and this is reflected in escalating land and deal prices and lower yields in the sector. Potentially, we are facing another record-breaking year.”

Lodders Annual Property Seminar returned last month (30 March 2022) as an in-person event for the first time since 2019. Around 100 members of the UK property and real estate sectors including land agents, property advisers, developers, housebuilders, joined Lodders’ staff at The Ardencote Hotel Conference Centre, Warwickshire.

In his keynote address, David Sleath also explained how and why the look and feel of industrial parks has undergone an evolution: “They are not what they used to be, but are being built with more facilities that support worker wellbeing, to provide features such as outdoor gyms or running tracks, with plenty of outdoor and green space.”

Confirming the boom in industrial property, Claire Williams of Knight Frank revealed the latest market figures: “Industrial is outperforming all other sectors,” she said, “with a real pivot into the sector by investors. 2021 broke many records, and saw a real squeeze on the amount of industrial space available, and the shortage is driving rental growth, particularly in urban areas. Land values have doubled in the last two-and-a-half years, which is having an additional knock-on effect on rents and occupiers.”

But Mark Miller believes the industrial sector is unlikely to escape economic unpredictability and the war for talent: “The sector is susceptible to the same market volatility and head winds as other sectors, particularly in terms of supply of materials and labour,” he explained. “2022 will be all about resilience, innovation and corporate responsibility.

“Hybrid working is here to stay, and whilst the pandemic changed everything in terms of office space, the office needs to evolve,” he added. “The focus now is on a flexible, agile, high tech and high quality working areas that complement home working. Floor space take up and transactions are all rising for Grade A stock, with particularly rapid growth and investment in the tech, media and telecoms sector. Occupancy levels are now up 25% on 2021 levels.”

The conference also explored the shape of the housebuilding sector. Mark Miller commented: “Housebuilders are behind sustained demand for longer term strategic land, which has continued unabated: Housebuilders want a pipeline and land under contract and control. Schemes are gravitating towards larger sites, with hybrid – part promotion/part option – type arrangements increasingly the norm.”

Head of Lodders’ recently launched environmental law service Lee McBride, delivered an overview of the environmental activities in the property sector: “Across the sector there needs to be a commitment to aligning a better environment,” he said. “This started in 1990 – a key year for environmental law – and more recently, attention on the behaviour of companies like Vedanta, Shell and other PLCs has grown, along with the view that they have to be held responsible for the environmental actions of their subsidiaries.”

Also speaking was Charles Binks of Knight Frank, who said: “Changing habits of tech savvy, mobile-first consumers has meant a race for space to meet demand for on-demand home delivery. Demand for space is also being influenced by the bounce-back in advanced manufacturing, helped by the growth in reshoring, and with businesses increasingly reliant on big data, data resilience is adding to this from suppliers such as AWS.”

Other speakers from Lodders were real estate partners Alastair Frew and James Mottram.