However, with a gradual improvement in conditions in some parts of the industrial market, and structural issues adversely affecting growth prospects elsewhere, there is a move from investors to increase their exposure further.

Industrial property investment logic stacks up

The industrial sector has suffered from declining capital values and a drop in occupier demand (25% in 2012), both of which have discouraged investors. However, things are changing:

• Parts of the office sector, especially outside London, continue to suffer the effects of lack of investment and delayed maintenance. LSH data shows that 27% of vacant regional office space should be considered obsolete and is not currently in a lettable condition. With a simpler build and occupier requirement, industrial is less susceptible to obsolescent design.
• The retail sector is undergoing changes that look to be permanently decreasing the amount of investment grade retail property. The decline of the high street; the rise of internet retail; and the continued pressure on household expenditure has combined to create an almost perfect storm in some parts of the market.
• Yet industrial is beginning to experience something of a turnaround. The rate of reduction in capital values is slowing and the level of income return, superior to the other main asset classes – IPD report an average of 7% for industrial versus 5.9% for retail and 5.5% for offices – are both reasons for investors to give greater consideration to the industrial market.

Lack of quality warehousing causing tenants to delay plans

However, the decision to invest is not straightforward: our own analysis suggests take-up in the industrial market fell by 25% in 2012. Yet, there are mitigating factors, not least of which is the lack of grade A industrial stock. Just 10% of available stock is grade A. This lack of choice leaves increasingly selective occupiers with little option but to delay expansion decisions until the quality of the stock develops.

With the logistics and distribution market achieving growing on the back of the success of online sales channels, and niche e-tailers entering the market in volume, the demand for fit-for-purpose, grade A warehousing stock appears ready to grow.

Mid-box segment makes sense

While the SME end of the warehousing marketplace (up to 50,000 sq ft) offers investors a more risky investment profile, we see the growth of e-commerce as particularly positive for the 50,000-100,000 sq ft size range. Demand for this mid-box warehouse is particularly set to grow on the back of demand from the parcel delivery specialists, who need these specialist warehouse close to major conurbations in oder to complete the final stage of the online shopping process. Given the lack of quality warehousing stock in this segment of the market, and the pent-up demand, this ‘mid-box’ warehouse segment appears to hit the sweet spot for industrial property investment opportunities.

More than a safe haven?

The industrial market has long been recognised as a comfortable safe-haven for investors. In the past it may not have delivered the returns expected of other sectors, yet, it is known to bring balance to commercial property portfolios. The alignment of circumstances may now enable the sector to stake its claim as the opportunity with the most attractive investment profile in the commercial property asset class.

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This article is part of Asset Class summer 2013.