2015 was an extremely favourable year for industrial and logistics property, both in the occupational and investment markets.
Now that we are almost halfway through 2016, where do we think the market is now? Well, momentum behind lettings volumes has slowed and void rates are stubbornly high at 10.6% compared with 8.4% last year, according to MSCI figures.
However, strong take-up of space in our Industrial Property Investment Fund suggests there is demand for the right space, while tenants will still pay top rents to secure prime locations; distribution units in Park Royal recently achieved around £15-£16/sq ft, for example.
Industrial and logistics assets also remain high on the shopping lists of investors. Against a slowdown in transactions in the wider commercial property markets this year, the volume of deals in the industrial sector increased by more than 30% on Q4 2015, according to PropertyData.
However, we have noticed a shift towards institutional investors becoming more discerning with a resultant improvement in grade-A pricing. More challenging assets are proving difficult to sell, with some evidence of downward pressure on secondary values.
Growing demand-side pressure
Looking forward, we think ecommerce-derived demand from retailers and delivery providers seeking urban logistics solutions is here to stay.
But an arguably more interesting trend is what we call ‘sector synergies’: non-standard tenants such as gyms, restaurants and even trampoline operators in ‘traditional’ industrial space. There are numerous examples within our portfolio, and with the rise of leisure services we expect to see further fluidity across the tenant base.
An even more compelling argument can be made for the supply side. There has been a lack of new development, particularly of multi-let estates, against a significant weight of pressure from conversion of industrial units to residential.
Our research suggests that a 1% increase in population is associated with a 1.9% decline in industrial stock; the UK population is expected to be 18% larger in 2025 than in 2020, so this pressure will not abate any time soon.
The development of new homes also supports the trade sector, another key source of demand. Housing transactions, the key metric for this sector, are up 13% on the equivalent period last year, according to HMRC figures, and against the wider structural trend of ‘getting someone else in’ for maintenance, we believe the tailwinds behind trade are favourable.
So it is a relatively simple sum to determine how the factors create the tension required for rental growth. As we move into the next stage of the cycle, it is these fundamentals which underpin our belief that industrial will outperform once again.
Jonathan Holland is senior fund manager at L&G Property