Take-up of large industrial property in the UK was at its highest recorded level during 2015, according to Gerald Eve’s latest Prime Logistics bulletin.
Despite a 5% dip in take-up during the last quarter of 2015 – following a particularly strong Q3 – new leases were signed on 44.4 million ft² (4.1 million m²) of space over the past 12 months, the strongest year since Prime Logistics was first published in 2006 and 2 million ft² (185,000m²) higher than during 2014.
The continued expansion of internet retail underpinned much of the demand, accounting for 12% of take-up during 2015, four times as large a proportion as in 2009. Of particular importance was Amazon, which on its own took 15 buildings totalling 2.4 million ft² (223,000m²) – more than 5% of the market – amid ongoing speculation over the UK roll-out of its online grocery services.
Amazon’s increased warehouse space is indicative of the ongoing rise of internet retail, which is becoming an increasingly important driver of demand for large industrial property. Take-up by internet retailers – not including dedicated parcel delivery companies – hit 5 million ft² (464,000m²) during 2015, some 12% of the total market. This compares to less than 1 million ft² (93,000m²) in 2009, when it represented just 3% of total take-up.
It is a trend that looks set to continue: Gerald Eve estimates, using a ratio established by Prologis, that every £1bn (€1.28bn) in consumer spending online equates to a requirement for a further 930,000ft² (86,000m²) of warehouse space. With Euromonitor suggesting online retail sales could grow by as much as £18bn (€23.1bn) between now and 2019, internet retailers could be in the market for a potential 17 million ft² (1.6 million m²) of space.
The strength of the occupational market was reflected in the response of developers, with new starts hitting 18.9 million ft² (1.75 million m²) over the course of the year – 28% more than in 2014 – of which half were speculative. This is still below the 2007 peak of 22 million ft² (2 million m²), but is the highest level since the downturn and, crucially, appears to have been undertaken with location and occupiers’ requirements in mind.
Richard Ludlow, partner at Gerald Eve, said: “Prime Logistics paints a picture of a market in rude health, and in the majority of locations this is an accurate portrayal. Q4 followed where the rest of 2015 had led, with strong occupier demand and an increasingly confident development market beginning to address the acute supply shortages in the most in-demand locations.
“Perhaps most encouraging is the prospect that this has some way to run. The ongoing growth of online retail will generate significant requirements in the coming years, a shift that will underpin demand for large industrial property for some time. Where it was once the supermarkets, and then the automotive industry, it is now online retail that has become the key sector.”
Investment outlook
With Q4 seeing a slight moderation in the amount of money targeting the sector, and less pressure to invest from institutional and retail funds, prime yields stabilised during the quarter as the investment market became less frantic than earlier in the year. Prime investment opportunities remain tight, but an increase in the availability of secondary assets is satisfying some of the demand, particularly among new entrants seeking exposure to the sector.
The outlook for 2016 is a broadly positive one, although on more measured terms than recently seen. The builders of speculative schemes are likely to take profits and recycle capital, which should translate into more prime opportunities for buyers. Whilst an increased supply of institutional quality investment stock would certainly be welcomed, it would be likely to divert some of the attention from the secondary market. This could arguably lead to secondary yields stabilising or even moving out slightly as investors revert to better quality opportunities.
George Underwood, partner at Gerald Eve, said: “The number of prime opportunities remained low during Q4, in line with the rest of the year, and it was secondary product which dominated, often sold as part of portfolio sales by landlords looking to recycle trickier or smaller assets to take advantage of the lack of prime alternatives.”
“However, the mismatch between supply and demand and the wall of money targeting the sector, which led to significant yield compression during 2015, is starting to be addressed and this will have a commensurate impact on the investment market over the coming year. We expect investors to continue to be attracted to the sector's occupational supply/demand imbalance, which is still sufficiently acute to suggest a compelling rental growth story and will only be helped by the forecast growth of online retail sales.”
