Despite a challenging economic backdrop, 2021 will continue to witness inflationary pressures on rents.
Source: Colliers - Note: Occupier deals 100,000+ sq ft
Source: Colliers - Note: Units 100,000+ sq ft
There is strong buyer competition with portfolio opportunities being traded at a premium as they allow investors to scale up.
Andrea Ferranti
Associate Director, Research, Colliers
Pictured: Mountpark Bristol 360 | 359k sq ft cross-docked speculative warehouse (recent Colliers instruction)
Despite lockdowns and localised restrictions, there remains a strong appetite for prime industrial assets, both multi-let and single-let distribution warehouses. According to Property Data, industrial investment volumes reached £10.2bn in 2020, 33% ahead of 2019. Interestingly, industrial investments accounted for a record 22% share of total investment volumes as Q4 topped £5.5bn, the largest quarterly activity on record. According to the quarterly MSCI digest, industrial total returns for the 12-month period to the end of Q4 2020 reached 9.0% (Standard Industrial) and 9.7%. (Distribution Warehouse).
Industrial investment volumes (£ ‘000)
Source: Property Data
Global multi-asset investors have continued to increase their allocation into the industrial sector as the pandemic resulted in decreasing occupier demand for office and retail assets. Overseas interest remains high and in 2020 foreign buyers accounted for a 44% share of total turnover, up from the 27% average share recorded over the period 2015-2019.
Prime investment opportunities in London are trading at around, if not sub-3% NIY, as investors are envisaging strong reversionary potentials and more rental growth to arise due to the lack of development land and the strong consumer economy. Prime South East assets are being traded at around 4% NIY, similarly in line with prime regional assets in core locations.
According to the quarterly MSCI Digest, industrial total returns for the 12-month period to the end of Q4 2020 reached 9% (Standard Industrial) and 9.7% (Distribution Warehouse). Pricing has remained largely stable with further yield compression occurring for strongly covenanted, RPI linked, long-let assets which have become highly attractive to annuity funds, property companies, core investors and international buyers alike.
Due to the pandemic, 2020 saw annual online commerce share of total retail sales reach 27.9%. It is plausible to expect this share to decrease once the UK is able to get back to some sort of normality. However, consumer shopping habits have changed, resulting in more consumers discovering the benefits of shopping online. In this respect, Colliers is forecasting an annual e-commerce share of total retail sales of 29% by the end of 2024. According to our analysis, this would mean that the UK could need an extra 51 million sq ft of logistics space. That said, there are some headwinds as the Bank of England is forecasting the unemployment rate to reach 8% by the middle of the year.
In Colliers’ latest Industrial & Logistics Market Update webinar, which was attended by over 600 industry professionals, attendees took part in a poll where 66% (out of 280 respondents) said they thought it unlikely that a drop in consumer confidence, due to the pandemic, would affect industrial take-up activity in 2021. When asked how long the boom times for industrial can last, 81% said they expected this buoyancy to remain throughout 2021 and beyond. Furthermore, 58% of respondents stated that yields will remain unchanged, while 34% expected further yield compression in 2021.
Rental growth is expected to remain relatively strong in 2021, whilst fierce competition for investment assets indicates that there will be further mild prime yield compression. Colliers is forecasting an annual ‘all industrial’ rental growth of 2.6% this year, with London and the Rest of South East’s rental growth expected to outperform at 3% and 2.9%, respectively.
For regional insight and analysis please request the full Industrial Viewpoint 2021 Report here.
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