This is the first of my quarterly snapshots for The Business Magazine on the industrial property market, writes Neil Seager.
This market historically has been overlooked in favour of the more glamorous office, retail and residential markets. However, its time in the sun has finally arrived. The sector is now firmly the UK institutions sector of choice with the Morgan Stanley Capital International (MSCI formally IPD) declaring back in February that the “UK Property Returns [are] driven by [the] strength of [the] industrial sector”. Investors are drawn by consistent demand, acute supply and rental growth. In addition the continued growth of internet retailing has given investors even more reason for industrial to be their sector of choice.
Surprisingly, investors can also point to the manufacturing output as a further driver to invest. According to the latest CBI industrial trends survey, Britain’s manufacturers increased production in June at the fastest rate since the mid-1990s. The strength of investor appetite in the industrial sector has lead to record yields being paid for property, with net initial yields recorded as low as 3.5% in outer London and 4.5% in the Thames Valley.
Rents in the Thames Valley have smashed through glass ceilings with prime rents now ranging from £11 to 14 per sq ft which is approximately 15-20% above previous records. To put this in context though there are rumours of rents being achieved above £20 per sq ft in west London locations which in some instances is higher than offices. We do not believe rents have stabilised and we are advising clients that rents are likely to increase further in 2018 as the supply situation becomes even more acute.
The availability of units across all size ranges is as low as it has been in my 20 years in the industry. Colliers last month stated that the UK only had one year of industrial property remaining based on current take-up levels. While this is good for landlords and developers, we are already starting to see this situation negatively impact occupiers as they are forced to change business strategies.
So what should we look out for in the near future? The first obvious trend will be development. We are already starting to see the first signs of speculative development. Peel Logistics has just completed its three unit 255,000 sq ft logistics park at Island Road, Reading (incidentally the middle unit on this scheme has already been leased to Argos), and Segro is onsite in Bracknell developing 90,000 sq ft speculatively at SEGRO Park. A number of the proposed developments in the region already have strong interest – expect to see schemes that secure planning consent to lease ‘off plan’ or during construction – proven by the 80,000 sq ft pre-let to Volution on Suttons Business Park.
Secondly, as brownfield land for industrial development remains in short supply due partly to the need for housing and redevelopment in the last ‘commercial development cycle’, it is likely that greenfield sites become the focus of industrial developers in the same way they have had to in order to meet housing demand. Arguably industrial development on such sites should be given equal weight to proposed residential development.
It is clear from those local plans in the Thames Valley which are currently in the process of being drafted that industrial and commercial development is not being given anywhere near the coverage of land for housing. The growth of business is vital to the economy to include provision of labour and economic structural support. Without commercial property to service the economy it will stall. In the current political and economic climate, the UK cannot afford for this to happen. Local authorities need to wise up to this situation and listen to the arguments on greenfield land from industrial developers as well as housebuilders. Landowners should also take off their blinkers. In some locations including parts of Thames Valley, net land values for industrial development are now higher than for residential development.