M&A activity making life harder for investors

The growth of online retail and last-mile delivery has created an almost insatiable appetite from investors and developers across the globe trying to buy a slice of the action here in the UK.

In a mature market, with low-risk long-term asset management potential, a diverse occupier base, strong covenants and great returns, who could blame them? However, with a critical lack of available land and a tight-knit community of key players, the UK logistics sector is off the menu for most. As a result, rather than start from scratch, we have seen a number of significant mergers and acquisitions over the past 12 months that offer big global investors a seat at the table.

The recent sale of IDI Gazeley to Singaporean-backed GLP is a perfect example of this. Well established both in the UK and Europe with a mixture of built assets and a sizeable land bank, GLP should have no problem generating income.

Similarly, Blackstone’s sale of Logicor to the China Investment Corporation (CIC) saw 32.2m sq ft of industrial assets change hands in the UK alone. The past couple of months have also seen the merger of European outfit Panattoni with UK development manager First Industrial. Arguably with a smaller existing land bank, they will instead be able to capitalise on First Industrial’s established profile and strong occupier relationships.

One consequence of all this activity could be a wave of new speculative development. It is no secret the UK is suffering from a significant lack of supply. While fund managers have been cautious about putting spades in the ground, this influx of foreign currency could see the floodgates open.

Yet there is still a need for caution. Without the right product in the right location there is a risk of saturating the market with unsuitable stock and no one, least of all landlords and developers, wants to see a repeat of the recession years. This, therefore, is the benefit of buying an existing platform well versed in the intricacies of the UK market, because decisions can be made in a more considered fashion.

Yields on assets are being driven lower partly due to the number of investors pursuing such limited stock

For investors, though, this could restrict the supply of new-build units available to buy. Initial yields on prime assets are being driven lower partly due to the number of investors pursuing such a limited amount of stock.

Historically, there has always been a raft of developers/traders who are fleet of foot, building and selling as they go, but these latest entrants appear to be in it for the long run. Sovereign wealth funds such as CIC are attracted to the UK because of the strength of the market and so are likely to adopt a long-term asset management strategy.

Overall, with just a few significant players sweeping up the competition, it should help better regulate the market and limit the prospect of overdevelopment. If landlords remain sensible, the supply/demand imbalance could even encourage steady rental growth. From an investment perspective, while it may be bad news for those looking to enter the market, this should keep prices high and yields low when product does come to sell.

Richard Sullivan is national head of industrial and logistics at Savills