UK Industrial Spotlight – Oct 23

• In a recent JLL Investor Survey multi-let industrial came out top when investors were asked which of 13 commercial property sectors they expected to provide the greatest opportunity over the next five years.

• The latest IPF Consensus Forecasts published in September 2023 highlight an expectation among 16 independent forecasters that the industrial sector will deliver a higher total return than offices, high street retail, shopping centres and all property over the five years 2023-2027.

• The logistics market has seen a slowdown in take-up this year, after three very strong years. However, sustainability and wider ESG considerations will support good long-term demand from occupiers for new buildings.

• Recent GDP data revisions suggest that the UK economy expanded by 1.8% between the start of the Covid pandemic to Q2 2023, whereas previously it was believed to have contracted. However, the rate of growth over recent quarters and months has been muted which suggests economic conditions remain challenging. The monthly GDP is estimated to have grown by 0.2% in August 2023, following a fall of 0.6% in July 2023.

• CPI inflation was unchanged in September at 6.7%, the same annual rate as in August. The Bank of England’s Monetary Policy Committee (MPC) held Bank Rate stable at 5.25% when it last met in September following 14 consecutive increases. However, while Bank Rate is likely to be at or close to its peak the cutting cycle may not begin for nine to 12 months. The MPC does not expect CPI inflation to return to the 2% target until 2025.

• Our latest data on the big box logistics sector, based on Grade A units of 100,000 sq ft, show a softening in take-up in Q3, but also a reduction in overall headline supply. Headline rents continued to increase.

JLL’s latest data based on our assessment of prime headline rents shows further rental growth in Q3 for both big box logistics and smaller standard industrial units. Based on 32 market locations, UK prime headline rents in the big box logistics market rose 1.1% in Q3 and by 7.1% over the first nine months of this year. In the 12 months to September rents increased by 8.6%. Based on 62 markets, prime headline rents for UK standard industrial units between 10,000 and 20,000 sq ft rose by 1.6% in Q3 and posted growth of 5.3% over the first nine months of this year and 7.3% over the past 12 months.

According to the MSCI Monthly Index, UK distribution warehouse rents rose by 5.2% in the first nine months of 2023 with standard industrial rents up 5.3%.

In the first nine months of 2023 some £3.4bn of industrial stock was traded in the UK, compared with £10.5bn over the whole of last year and a record of £14.8bn in 2021, according to JLL’s latest data. Within the industrial sector the value of multi-let assets transacted exceeded that of distribution warehouse (logistics) assets with £1.9bn and £1.5bn respectively traded in the first three quarters of this year. This has not happened in a full calendar year since 2011. In a recent JLL Investor Survey multi-let industrial came out top when investors were asked which of 13 commercial property sectors they expected to provide the greatest opportunity over the next five years.

The positivity towards multi-let and mid box assets reflects a number of factors. First, investors regard the market fundamentals as strong in large part because these assets are predominantly located in built up urban geographies many of which have registered both a decline in their stock of industrial land and a growth in their resident populations. Second, forecasts remain relatively favourable for industrial compared with offices, high street retail, shopping centres and all property generally, as highlighted by the latest IPF Consensus forecasts. Third, many investors are attracted by the potential offered by multi-let assets to diversify risk, secure reversions and add value by asset management initiatives.

Our September Industrial Spotlight highlighted some recent multi-let transactions, including Tritax’s purchase of a 3-unit scheme of c 185,000 sq ft in Enfield, London from IM Properties for £50.5m and Valor’s acquisition from Lothbury Investment Management of the 341,000 sq ft Tera 40 estate in Greenford, London for £146.3m. However, the most recent standout industrial investment deal is a multi-let logistics deal involving DTZ IM’s purchase of Coventry Logistics Park from Bericote and JP Morgan for £140.4m reflecting a net initial yield of 4.5%. This scheme comprises three assets totalling 784,898 sq ft let to DHL, Geodis and Viad. The leases have a WAULT of 11.81 years all three have rent reviews to the higher of the open market or CPI, ‘cap and collared’ between 2% to 4%.

The above transactions support JLL’s assessment that prime yields (which moved out sharply last year) are currently around 4.75% in London, 5.00% in the South East and 5.25% in the core regional markets for both prime multi-let and logistics assets. By contrast, poorer quality secondary or tertiary stock are under pressure on pricing, because, whilst inflation has come down, SWAP rates have risen recently.

As reported in our September Spotlight, ‘Industrial Open Storage’ is emerging as a growing segment of the industrial sector. In September, Blackstone added to its acquisition of the Ridham Dock Estate in Sittingbourne with the purchase of Link Park near Heathrow. The rental growth prospects in this segment of the market are good due to constrained supply and robust demand.

JLL latest take-up data based on Grade A units of 100,000 sq ft show that the amount of floorspace transacted across GB in Q3 2023 slipped back compared with both Q2 and Q1. However, the overall level of headline supply immediately available and under construction, including under offer space, also fell.

In Q3 2023 the take-up of Grade A floorspace decelerated to just 2.9m sq ft across GB involving 14 transactions. This brought the overall quantum of space transacted in the first nine months of the year to 12.0m sq ft.

The headline level of supply fell by around 2.0m sq ft, a 5.7% reduction on the corresponding mid-year level, and the composition of supply changed over the quarter. The proportion of space available in completed new buildings rose, as space under construction completed, while the share accounted for by space under construction fell with fewer new starts coming through - countering fears that supply will outstrip take-up in this slower period of the market. This trend is likely to continue in the near-term with few developers likely to activate new speculative development projects. As noted above, prime rents continued to rise.

Given all the prior speculation, there were few surprises when Prime Minister Rishi Sunak announced at the Conservative Party conference on 5 October that the Government would scrap HS2 between Birmingham to Manchester, having previously cancelled the line to Leeds. However, more unexpected was his announcement that the safeguarding process would also be lifted. This could open up some potential opportunities for new industrial development along the different sections of the HS2 route. The Department of Transport is expected to confirm details relatively quickly for the Birmingham to Manchester section.

In any assessment of the future of supply chains the impact of technology and sustainability typically figure prominently. However, at a time of economic challenges and elevated uncertainty and risks, many companies may be tempted to focus on short-term financial performance and leave investment in technology and sustainability for another day. Whilst this may seem prudent, it risks ignoring the potential of both technology and sustainability initiatives to deliver quick business wins without necessarily involving substantial financial investment.

At a recent event hosted for clients, JLL’s Supply Chain team sought to engage with clients to consider a range of innovations in supply chains, including how technology can help to reduce costs and provide immediate operational benefits and how it can support long-term sustainability goals.

In the logistics property sector, technology is often associated with large-scale investment in systems, such as automated storage and retrieval systems (AS/RS) or conveyors and sortation systems, and often new warehouse buildings as well. However, not all investment in technology needs to be on such as scale or come at such a cost. For example, there are now a growing range of intra-logistics service providers offering smaller-scale ‘modular’ automated solutions that can be fitted into existing facilities and which can provide immediate gains in productivity for smaller, but scaleable, investment.

Second, technologies can be utilised in existing warehouses to provide enhanced inventory data and visibility. One example are the robots made by Dexory, which can scan a warehouse’s entire inventory (up to a height of 15m) to provide real time data and visibility of a warehouse’s stock so helping to reduce inventory costs, enhance logistics operations and improve customer service.

Third, in logistics as in other activties, there is a growth in on-demand services that make it possible for companies to secure solutions without having to make a large capital outlay. These include digital Warehouse as a Service (WaaS) platforms, Robots as a Service (RaaS) and digital platforms which enable companies to source on-demand freight transport capacity without the need to own their own vehicles.

In the UK, digital WaaS platforms have not to date made significant inroads into the market, in part because this ‘on-demand’ solution is largely already covered by traditional multi-user warehouses offered by third party logistics service providers or by niche providers such as Warehouse Space.

The sharing of freight transport capacity is clearly one area that has potential to offer companies a way of both reducing their costs and carbon emissions. The opportunity here is considerable given how much road freight transport runs empty and the contribution road freight makes to carbon emissions. For example, the latest official data shows that in 2022, GB registered HGV travelled 5,846m kilometres whilst empty, 30% of the total (loaded and empty) vehicle kilometres travelled during the year (19,533m kilometres); and in 2021 transport was the largest emitter of UK Greenhouse Gas emissions (26% of the total) with HGVs accounting for some 21 MtCO2e, 20% all transport emissions. One example of a company digitally connecting shippers with carriers is DigiHaul, which connects shippers with a community of some 700 trusted carriers in the UK, and provides real time visibility of the shipment journey.

Finally, of course, technology has a key role to play in reducing the carbon emissions produced during the construction of new warehouses and during the operational life of the buildings. For example, drones can help generate better information for Building Information Modelling (BIM) to support construction activites throughout the build, and sensors can be installed on buildings to track key data on energy usage, and other metrics, during the warehouse’s operation.

Working in collaboration with our global partners, Miebach and DLL, JLL’s Supply Chain team provides clients with end-to end supply chain and real estate solutions.