Industrial market report Q2 2021

Investment volumes in the industrial sector over last 12 months increase by 75% as investment levels in the sector have soared. 

The final quarter of 2020 was exceptional with £4.6bn invested and investment levels have remained robust into this year (Q1 £3.1bn and Q2 £3.2bn).

Online retailing continues to drive strong demand

There have been many headlines about the strength of growth in online retail sales (reaching 82% year on year at its peak in 2020) but that could not continue indefinitely and with stores reopening there has been a drop in the value of online sales. There is no doubt though that online retail remains strong and will continue to fuel strong occupancy demand. Demand for distribution space is both for large scale regional hubs but also smaller requirements for last mile logistics. With low vacancy rates (3.4% across UK industrial) a shortage of suitable stock may limit future take-up levels and help to drive future rental growth.

Upturn in manufacturing conditions

Latest readings of the IHS Markit/CIPS UK manufacturing PMI signals a strong pace of expansion in the manufacturing sector. In particular, new order growth and the pace of job creation remain close to the highs reached mid-year (May-2021). The business confidence component of the index suggests that the upturn in current manufacturing conditions has further to run.

An upswing in the development cycle is well underway

The current shortage of available space will change as developers have already responded to the opportunity. Construction levels are at their highest in over 10 years. For the UK as a whole there is now 58 million sq ft under construction, a jump of 43% on levels this time last year. Similarly, for the South East, industrial space under construction has increased by 41% to 10.6 million sq ft.

Industrial sector remains in favour with investors

Investment levels in the sector have soared with prospects for rental growth a significant factor in attracting investment attention. The final quarter of 2020 was exceptional with £4.6bn invested and investment levels have remained robust into 2021 (Q1 £3.1bn and Q2 £3.2bn). This has driven yield levels lower; the question now is how much further the sector has left to run. Through the last year or so average UK yields industrial have fallen below office yields. Current prime yields sitting between 3.25% and 4.5% dependent on location.

Outlook

The shift in sentiment from the start of the year to the middle of the year has been dramatic. At the start of the year, many parts of the economy were in lockdown and the vaccine rollout had only just begun. Fast forward to mid-year and sentiment and optimism is significantly stronger across a range of Covid and economic related measures. This is matched by stronger market conditions for the real estate sector (both investment and occupier markets) which is expected to continue; particularly given the continued easing of restrictions and the strong bounce back in the UK economy.

For those investors holding a diverse portfolio of real estate investments, the stronger performance of the industrial sector will have provided protection from weaker performance in other sectors. For now, there continues to be strong demand for the industrial and logistics sector from investors and occupiers alike. Demand for distribution space is both for large scale regional hubs but also smaller requirements for last mile logistics. Notably now, affordability could become a problem for occupiers and investors. There may well prove to be a ceiling to what occupiers are willing to pay and similarly investment yields might be approaching their limit too.

Analysis

South East industrial: under construction

South East Industrial Under construction

Source: Cluttons and ONS. 

Online sales

Online sales Dec'18 - May'21

Source: Cluttons, ONS

Key statistics - Q2 2021

 Q2 2021 Industrial key statistics Sep 21

Source: Cluttons, CoStar, MSCI and Propertydata.

Key investment transactions - Q2 2021

 Q2 2021 Industrial Key investment transactions Sep 21

Source: Cluttons, CoStar and Propertydata. 

 


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