A turn for the better

ACTIVITY PICKS UP AGAIN

Total volume across the industrial & logistics sector amounted to £6.6bn in 2023, down 44% on 2022 and paling in comparison with 2021’s record high of £15.2bn. However, amid a challenging year for the investment market generally, the sector still managed to outperform in terms of both activity and returns.

Reflecting relatively sound fundamentals in the occupier market, industrial and logistics accounted for 30% of the combined volume across the three core commercial sectors in 2023, significantly ahead of the long-run annual average of 17%. Volume was also 20% above the pre-pandemic annual average, which compares well with other sectors, most notably offices, where 2023 volume sank to a record annual low.

The steep drop in y-on-y volumes also largely reflected a lack of major transactions alongside a significant recalibration in pricing since mid-2022, as opposed to a collapse in transactional activity. 2023 saw only 11 deals over £100m and an absence of transactions in the £200m to £400m lot-size bracket for the first time since 2008. Hence, Blackstone’s £480m purchase of the Harbert/Canmoor Portfolio, in Q2 2023, was the year’s largest deal by some distance.

Source: LSH Research

LONDONMETRIC BUCKS THE TREND

The recent merger of LondonMetric and LXi REIT resulted in the former pushing forward with a flurry of acquisitions. The listed investor was Q2’s most acquisitive industrial buyer, purchasing seven assets totalling £72.3m, including the £26.4m (NIY 5.75%) sale & leaseback of Farmfoods’ facility in Avonmouth. This marked a clear bucking of the general trend, with quoted propcos involved in record net disposals of UK property to the tune of £2.6bn in Q2.

OVERSEAS CONTINUE TO LEAD

Overseas investors continue to drive the market, with £696m of purchases and £232m of sales in Q2. As a result, overseas investors were the leading net purchasers of UK industrial for a twelfth successive quarter in Q2. Meanwhile, despite L&G’s major deal at Magna Park, UK institutions were the biggest disposers of industrials for a ninth successive quarter, with total net selling of £235m in Q2.

Source: LSH Research

POSITIVE INDICATORS

An array of factors is set to drive further improvement in investor sentiment. Measures of business confidence have improved considerably in recent months while occupier market activity rebounded back to pre-pandemic levels in Q2. Labour’s landslide election win provoked limited reaction from the markets, although its promise to reform the planning system and ‘get Britain building’ sounds a positive note for the future supply of industrial and logistics space.

YIELD COMPRESSION LOOKING MORE PROBABLE

While prime yields were stable in Q2, a sequence of expected cuts to the Bank Rate over the next 12 months should help to reduce borrowing costs and drive gilt yields down, in turn putting downward pressure on yields. An expected narrowing of the bid-ask spread should help to drive improved transactional activity, with volume in H2 boosted by anticipated sales of several portfolios from the likes of SEGRO and Westbrook.

Source: LSH Research