Although increasing interest rates have resulted in a 2023 market slow down, there’s still appetite for investment in UK industrial thanks to growing rents, occupier demand for prime stock and robust market fundamentals, was the theme which emerged from Colliers latest UK Industrial & Logistics webinar.
More than 300 people tuned into the commercial real estate firm’s update on Wednesday 1 November, which featured a market presentation by Len Rosso, Head of UK Industrial & Logistics and Andrea Ferranti, Head of Industrial & Logistics Research as well as a panel discussion between Kevin Sey, Vice President CRE UK & I for DHL, Rory Buck, managing director at Clarion Partners, and Edward Plumley, co-Head of European Industrial & Logistics at Colliers, chaired by Jessica Middleton-Pugh from React News.
The discussion opened on the many challenges facing industrial occupiers which is resulting in a slowdown in take up. Colliers latest analysis shows that Q3 take-up reached 4.9m sq ft bringing the 2023 Q1-Q3 total take up to 15.9m sq ft, a 51% contraction when compared to Q1-Q3 2022. Looking at longer term trends, take-up activity is down 26% on the 10-year pre-covid Q1-Q3 average. However 59% of take up this year has been within new prime warehouse space.
“Within DHL we’re going through a change in the quality of buildings we have and ESG is critical to that,” explained Kevin Sey, Vice President CRE UK & I for DHL during the webinar. “There is going to be change, but there’s a cost to this change. Across the industry businesses are suffering from the cost of construction, racking and everything else, which means it’s a bigger decision and people are waiting a little bit longer before going forward with decisions.”
Rory Buck, managing director at Clarion Partners highlighted during the panel discussion how investors can work closer with occupiers to achieve their ESG goals. “We are seeing that if you can provide buildings which are more operationally and sustainably efficient and can create lower overhead costs for the occupier, then we’re seeing occupiers are more willing to pay comparably higher rents for that building,” he said. “We’re seeing a bifurcation in the market, where modern sustainable buildings are attracting higher rents and tighter yields. But over time this is going to change from a premium for prime buildings, to a significant discount for secondary assets.”
Analysing the supply in the market Colliers observed a 5.5% increase in Q3 (q/q) to 33.6m sq ft, in part due to the completion of a total of 14m sq ft of speculative schemes from January to September 2023. Looking ahead, Colliers is tracking circa 9.5m sq ft of speculative constructions, which are scheduled to complete during the next 12 months.
Despite the rising supply, the sector is still enjoying robust rental increases with the latest MSCI data showing a UK monthly rental growth of 0.6% in September, equating to a 7.2% average annual growth. This year Colliers expect a UK average rental growth to be between 6% and 6.5%.
Len Rosso, Head of UK Industrial & Logistics at Colliers said: “I think the market has been really resilient taking into account this current slowdown, and the rental growth is exceptional. We do believe that towards the end of 2024 the borrowing cost will ease and yields will start to come in making the sector more attractive to investors. The supply and demand dynamic is still strong, and we think that rents will continue to grow over the next three to five years, because of this it will still be the sector of choice for investors.”
Andrea Ferranti, Head of Industrial & Logistics Research at the firm added: “After strong rental growth this year so far, we’ve upgraded our rental forecast to be at 6-6.5% for 2023. Looking ahead to 2024 the current suppressed attitude to speculative development will sustain rental growth over the next few years, averaging around 4% in 2024-5, and up to 4.5% in 2026-27.”
During the webinar members of the audience were asked: What would occupiers in general prioritise when looking to take-up new space over the next six months? The majority of the respondents chose location for access and talent (51%), followed by lease flexibility (24%), ESG credentials (14%) and minimal cap-ex expenditure (11%).
Webinar attendees were also polled about which segment they predicted would produce the greatest returns in 2024: mid-box urban logistics topped the ranking at 43% closely followed by multi-let (39%) with Big Box being selected by just 18% of the respondents.
Colliers’ latest analysis shows that there is still appetite for core+ and value add investment opportunities in core locations, but often the gap between sellers’ aspirations and buyers’ expectation has been hampering transactional activity.
Rory Buck, managing director at Clarion Partners, explained the investment slow down: “The reason why the investment market is so subdued is not necessarily the increase in interest rates but more the volatility of where they’re going to be,” he said. “It’s really just the volatility which is anaemic to the growth of deploying capital.”
Edward Plumley, co-Head of EMEA Industrial & Logistics at Colliers also responded to the poll saying: “I think there’s merit in all the sub sectors, particularly for urban logistics where we’ve historically seen consistent rental growth in the sector, as many occupiers need to be, in part, in close proximity to the customer as well as suitable labour pools as highlighted by the earlier poll question.
“The UK has been a beneficiary in terms of its share of European investment volumes which has been circa 37% so far this year. This is due to the market having been the quickest and furthest in its pricing reset when compared to other countries. The UK has the benefit of having upward only rent reviews every five years, which enables investors to capture rental growth in the short term in a challenging environment, when compared to European lease structures which is an attractive proposition for many investors as part of their pan-European portfolio right now.”