ILM   

Industrial and Logistics Market

Occupier overview

  • Investment overview

    While the relative performance of the Industrial & Logistics sector goes from strength to strength, the main challenge is finding value and opportunity in the market.


    • Industrial volume bucks the trend

      Strong demand for industrial and logistics assets has been clearly reflected in transaction volume. £3.7bn of assets changed hands in H1 2017, the second highest level for a half-year period on record. This stands in marked contrast with other property sectors, where H1 volume for regional offices and retail undershot their trend level.


      Activity also gathered pace as H1 unfolded as more sellers opted to bring to stock to the market. Q2 volume of £1.9bn was the highest since Q4 2014, driven by a record quarter for distribution warehouses, with volume of £1.3bn.


      Many key deals were  done off market in Q2, including Tritax Big Box REIT’s acquisition of Ocado’s warehouse, Birch Coppice (NIY 5.25%) and a Korean Consortium’s purchase of Sainsbury’s distribution warehouse, Hams Hall (NIY 4.77%).

    • A crowded marketplace

      Having traditionally been dominated by the institutions, the market has become significantly more crowded and competitive. While strong investor interest exists for secure income stock as elsewhere, constrained supply and positive occupier market fundamentals in the sector are also driving strong demand for short income and asset management opportunities.


      H1 2017 saw virtual parity of volume between domestic institutions and overseas buyers, both of whom invested circa £930m during the period. Competition has been fierce for openly-marketed stock, with strong interest from institutions, quoted propcos, overseas and private investors. A number of multi-let estates sold in Q2 saw over 10 formal bids, with up to four rounds of bidding in some cases.


      2016 saw the emphatic arrival of local authority buyers to the market, at trend which has continued in 2017. Taking advantage of access to low borrowing costs, local authorities purchased £160m of industrial assets in H1 2017 following purchases of £224m in 2016. Their advantageous position has been quite disruptive for well-let sub-£20m lot-sizes, where interest is primarily focused.

    • Yields pushed to record lows

      Following a brief wobble either side of the Referendum, yields across all types of industrial & logistics assets were back under pressure in late 2016, fuelled by a combination of limited stock and attractive occupier market fundamentals.

       

      On the back of very strong demand, prime yields for South East estates have moved below their pre-Referendum level to a record low of c. 4.50%, while prime multi-let product elsewhere is the UK is capable of achieving 5.25%. Similarly, after a period of relative stability, prime single-let distribution yields also hardened by 25bps during H1 2017.


      However, yields for secondary industrial product have compressed much more considerably as investors have moved up the risk curve in search of stock and better value. This was reflected in average transaction yields in Q2, where - for the first time ever - the rolling annual average transaction yield for industrial (5.9%) stood lower than retail (6.1%).


      Industrial and logistics is firmly on course outperform the wider market once again in 2017. Benefiting from both rental growth and ongoing weight of money targeting the sector, total returns are forecast to outperform All Property in both 2017 and over the five-year horizon.


    • The search for value

      At this stage of the cycle, the main challenge for would-be industrial investors is securing stock, particularly as there is little incentive for sellers to move out of a lead performing sector.


      The obvious outlet for investment is through selective refurbishment of existing stock or speculative development. Given structural change in shopping patterns, one particular strategy is to target existing assets in or around densely urban areas and refurbish product for the burgeoning need for ‘last-mile’ delivery centres.


      While the case for new development is compelling given prevailing dynamics in the occupier markets, investors are understandably more cautious in light of the more uncertain economic outlook. However, those brave enough to see through this risk and have faith in the long term structural growth of ecommerce may enjoy the greatest upside.

       

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