UK Industrial Market Dashboard – Key takeaways

Key takeaways:

Investment

• The largest deals of Q1 so far are a 7-asset logistics portfolio purchased by BentallGreenOak for £303 million, the Purdey Portfolio purchased by Partners Group for £253 million, and Bedfont Logistics Park, Heathrow, purchased by Blackstone for £118.5 million.
• Industrial investment volumes in 2020 totalled £10.3 billion, up from £7.7 billion in 2019.
• Preliminary deal volumes for Q1 show a total of £2.0 billion, though this total will rise as new deal information is gathered. This compares to £1.9 billion in Q1 2019.

Returns

• Monthly MSCI figures show positive capital growth for UK Industrial in February, with 1.01%, up from 0.72% in January.  Positive and accelerating year-on-year capital growth was also recorded, with 5.52% growth in the year to February, up from 4.63% in January.
• Annual total returns stood at 10.49% in February; the highest level since June 2019.
• UK industrial and logistics assets continue to offer a premium over other asset classes. Returns have consistently outstripped other property sectors as well as gilts, equities, and commodities, over the past one, three, and five-year horizons.

Occupier Market

• The largest deal of Q1, recorded so far, is the pre-let of 670,000 sq ft at Redhill Business Park, West Midlands by Pets at Home.
• Warehouse take-up for 2020 totalled a record 51.6m sq ft in 2020. This exceeds the previous record in 2016 when 46.4 million sq ft was taken.
• Analysis of the occupiers taking space show retailers and distribution companies dominated in 2020 – together accounting for 89% of total take-up (units over 100,000 sq. ft.)

Rental Growth

• Average rents have risen 2.4% in the year to February 2021 (Source: MSCI).
• Q4 2020 rental growth forecasts show expectations of accelerating rental growth over the next three years.
• Robust rental growth is projected for all regions over the next 5-years. London, the South East, and Eastern regions are expected to see the strongest growth.

Development

• Construction delays (due to a combination of lockdown and supply shortages) impacted the amount of space delivered in 2020.
• Rising planning applications and consents have bolstered the amount of space expected to complete in 2021, with 39.9m sq. ft. of space currently under construction, with completion dates scheduled for 2021 (though some of these dates are likely to slip into next year). This includes both speculative and build-to-suit development.

Industry/Trade

• The IHS Markit/CIPS Flash UK Manufacturing PMI rose to 57.9 in March of 2021 from 55.1 in February. The reading pointed to the strongest growth in factory activity since November of 2017. New orders also increased at the fastest pace for three months, despite another relatively subdued rise in export sales. Hopes of a sustained rebound in customer demand contributed to robust job creation and the highest level of business optimism about the year ahead outlook since April 2014.
• UK Import and Export volumes both decreased sharply in January driven by a dramatic fall in goods traded with the EU. Multiple factors may have contributed to the decrease in trade including disruption and stockpiling in the lead up to the end of the UK-EU transition period. The drop in trade volumes was largely to be expected, as stockpiles built up in Nov/Dec are worked through.

Retail/Distribution

• Online retail sales accounted for 34.1% of all retail sales in February, a slight decrease from 36.3% in January.
• With the vaccine roll-out well underway and 57% of the population having received their first doses, retailers and distribution companies along with manufacturers are increasingly looking past the immediate impacts of the pandemic and planning their supply chains, distribution models, and warehousing requirements for the long term.
• Online retailers and parcel carriers are starting to see the impacts of Brexit, with the ending of VAT exemption on low-value goods, increased paperwork requirements, and rules of origin issues. Around one-fifth of UK retailers sell to buyers in the EU (Source: ONS). The loss of access to the single market may mean that UK online retailers or distribution companies may need to look at establishing facilities within the EU. The same is true of EU-based retailers selling to UK customers.
• While the largest retailers may be able to establish distribution centres in the EU, smaller retailers rely on 3PLs to handle international B2C distribution. International distribution and logistics companies have been increasing their footprint in the UK market.
• German logistics firm DB Schenker, which temporarily suspended deliveries into the UK due to Brexit delays in January, is expanding its presence in the UK to accommodate new customer growth. In January 2021, it took an additional 153,064 sq ft unit at Centurion Park in Tamworth, West Midlands, where it already occupies 140,000 sq ft.
• Meanwhile, UK sportswear chain, JD Shorts plans to open a new distribution centre within the EU to avoid additional costs and paperwork. JD Sports imports from East Asia but the new rules of origin regulations mean these goods will face tariffs if they are re-exported from the UK to the EU.

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