Commercial Quarterly Examiner – industrial market update Q4 2024

In the space of ten years, the representation of the industrial sector within the UK’s All Property institutional commercial real estate market has doubled.

Industrials now contribute 40% by value to market level indices; back in December 2014 the sector amounted to 19%. 

In those ten years industrial capital values have grown by 72% whilst the value of the office and retail sectors has fallen by 20% and 36% respectively. The increased weight in industrial is partly the ‘denominator’ effect in action. Namely the value of industrial assets has grown in comparison to those in the retail and office sectors. It is also partly because institutions have actively rebalanced their portfolios driving investment demand. 

Strong occupational demand for logistics space has driven outstanding levels of rental growth especially during the Covid years when the phrases ‘last mile’ and ‘fulfilment centres’ became familiar. Annual market rental value growth peaked in 2022 at 18% in London and 11% in the South East and Rest of UK and was down to 4% by the end of last year. The slowdown in rental growth has partly been driven by increased occupational costs including business rates and energy. 

The industrial market is segmented between Logistics being 50,000+ sf of warehouse space; smaller Light Industrial units for local distribution, and smaller scale manufacturing and repair workshops; and Specialised space for large scale manufacturing, R&D, Cold Storage and data centres. Most of the UK’s stock of industrial space belongs to the logistics segment (66%) whilst 26% is Specialised and less than 10% Light Industrial. 

Occupational view  

Availability of Logistics stock to let across London, the South East and Rest of UK has been increasing since the end of 2022. UK wide take-up of space has been in decline in recent quarters and net absorption has been negative in the last two quarters meaning that more space is being made available than has been let. It is possible that 2024’s year of elections created a reluctance to transact against an uncertain geo-political background. 

The ONS has recently estimated a ‘golden logistics triangle’ that is within a four-hour drive of 90% of the British population covering 289 square miles in the West Midlands and demonstrates how widespread this market has become. In 2024 the demand for space in the UK’s regions was greatest across Northampton but also Shropshire, Staffordshire and around Birmingham, within the ONS’s definition. 

Of the 40.3 million sf of logistics space under construction in Great Britain, 15% is concentrated on Northampton. London is the next biggest development centre with 6% of total space under construction. Lidl’s Belvedere Distribution Centre in Bexley will provide 470,000 sf at a rent of approx. [£16.50] psf. 

Logistics operators have been driven by demands from their retail sector clients to adopt ESG policies leading to an increased demand for green buildings with an A or A+ EPC rating. Operators are setting targets, with DHL for example seeking to achieve 100% net-zero carbon warehousing by 2025. However, the availability of such space is limited and the demand is unlikely to be met soon as the amount of development under construction has fallen from 62 million sf in 2022 to 40 million sf at the end of 2024.  

A sharp increase in building costs and an almost simultaneous fall in capital values has brought the viability of many proposed schemes into question. 

Investment view 

Investment demand for logistics space has resulted in significant levels of capital growth, supported by market rental value increases and lower yields. Annual capital value growth reached 40% in London and 30% in the South East and the rest of the UK in 2022. After the interest rate induced impact on values of 2022-23, values are once again improving and were up 4% in the 12 months to the end of 2024. 

The superior investment performance of the industrial sector and many of its key centres compared to the All Property average has yet to be reflected in a sustained recovery in investment volumes traded. London and the South East experienced some improvement in liquidity in the second half of 2024 but any increase in Rest of UK activity has been limited.  

Investor preference is currently limited to London and a handful of key regional centres centred around Birmingham, Manchester and Leeds. London accounted for 41% of all transactions in 2024 across a selection of Great Britain’s strongest locations. Assets for sale in these locations may command investment yields of 5.5%. Investors will only be tempted outside these centres by a significant price discount of up to 150 bps. 

Value added asset managers will target purchases of multi let assets with a strategy focused on gaining vacant possession and refurbishing to drive rental growth. Core investors with a buy and hold strategy prefer to buy long and secure income on a big box and accept market levels of rental value growth.