The difference between 2014 and the first four months of 2015 is really quite marked.
Last year there were approximately £7bn of transactions involving multi-let estates and single-let distribution units. This was up 30% on the previous year, the highest on record, and approximately twice the long-term trend.
There were good levels of openly marketed investments, large and small, single- and multi-let. Most of these investments were strongly contested for by, predominantly, institutional investors, property companies (skewed to the single lets) and to a lesser extent, overseas investors. All of this helped to produce a very positive capital return performance, with the IPD All Industrial Index Futures recording 16% capital performance, the strongest on record.
This year so far has been somewhat different, with transaction levels down by approximately 50% compared with Q1 2014, and from what I can see there is little stock being openly marketed. It seems to me investors are looking to increase their exposure to the sector, as opposed to divesting from it and this is constraining supply. Talking to our key advisers doesn’t make me think the supply tap will be turned on to a great extent any time soon.
In terms of wider investment fundamentals, Aviva Investors expects interest rates to remain low for even longer and with five-year government bond yields at just 1.4%, we foresee continued strong inflows to real estate and into the industrial sector.
The occupier markets mainly appear to be in robust health. 2014 was a strong year for take-up across the sector and we expect this to continue during 2015. In most regions, vacancy rates are low and decreasing, with little or no grade-A space available. Void periods are shortening, incentive packages reducing and there are demonstrable levels of rental growth. All of these factors will contribute to the significant weight of capital that is looking to find a home in our sector.
For some time now, we have been positive towards speculative development both in the single- and multi-let markets. In April 2014, we purchased, by way of a forward commitment, a 12-unit estate in east London, where we only have one unit now available. We have also purchased sites in Wembley and Park Royal in north-west London and in Manchester, where we can deliver buildings of between 25,000 sq ft and 95,000 sq ft. We will be speculatively developing all of these sites this year and so far prelet interest is positive. We are also looking to secure further sites during the rest of 2015.
Demand comes, as always for our sector, from a diverse range of occupiers. Of note, though, are the trade occupiers that remain active in both the small (around 5,000 sq ft) and mid-size (around 40,000 sq ft) range, while online retailing continues to fuel demand, either from third-party logistics providers or the retailers themselves.
It will be very interesting to see how the rest of this year unfolds. I remain positive on the fundamentals and outlook for sheds large and small and can see limited supply and improving demand continuing to fuel rental growth and investor appetite for our sector.
Mike Green is head of UK industrial at Aviva Investors