Industrial market update Q1 2023
The strong performance in this sector over the last few years mean that the upheaval caused by rising interest rates and the September’s mini-budget, which caused a surge in gilt yields, was more pronounced than other sectors.
Yields rose by 100bps in the final three months of the year, and capital values dropped by 20.3% in the same period, even as rents rose by 1.8%.
Even in these more challenging conditions, strong rental growth is still being registered in some key regional markets outside the South East, reflecting the continued occupier demand in this sector – which in turn reflects that the fundamentals of these businesses remain strong. The relatively lower level of rents means that these markets, and others like them, may be more attractive for investors in the coming years, especially when the location is close to consumer demand hubs.
The table below shows the top 5 areas with highest annual rental growth at the end of Q4 2022:
| Average of market rent/sf | Average market rent growth, annual | |
|---|---|---|
| Milton Keynes | £10.72 | 16.4% |
| Liverpool | £6.74 | 14.9% |
| Tees Valley & Durham | £6.11 | 13.8% |
| Swansea | £5.54 | 11.9% |
| Hertfordshire | £13.04 | 11.8% |
There are signs that demand in logistics has softened somewhat, after a downturn in online sales from the peak at the start of the pandemic. Even so, rents in the final quarter for distribution warehouses still rose by 1%, although yields moved out by 110 bps in the last six months of the year. However, the dip in logistics demand has been offset by a rise in demand from manufacturers keen to expand UK production – the most recent GDP data refers to a large rise in the manufacture of pharmaceuticals towards the end of 2022. Average rents for standard industrial outside London and the South East rose by 2.3% in Q4 2022.
After a very strong start to the year, investment activity slowed in the second half of the year, as the shiver that ran through all property markets in light of high inflation, rising borrowing costs and the mini-budget was particularly felt in the booming industrial sector. However, even with such a pronounced drop in activity in H2, the total levels of investment for the final six months of the year were still in line with longer-term trends, a reflection of the strength of the industrial sector over the last few years.
As we move through this year and into 2024, ESG and business rate rises will be front of mind for occupiers and landlords alike, meaning there will be stiff competition among occupiers for best-in-class property, while occupiers with strong balance sheets will be conscious of their appeal, creating more opportunity for negotiation. As a consequence, rental growth prospects will come under pressure, especially in the South East.
| Industrial Q4 2022 unless otherwise stated | UK | London & South East |
|---|---|---|
| Distribution, multi-let estates and specialised industrial | Current quarter (last quarter / 5yr ave) | Current quarter (last quarter / 5yr ave) |
| Occupier | ||
| Availability rate (%) | 5.2% (5.2% / 5.6%) | 6.2% (6.3%/5.5%) |
| Vacancy rate % | 3.4% (3.5% / 3.2%) | 3.7% (3.9%/3.1%) |
| Rental growth (12-month growth rate) | 8.9% (8.9% / 6.3%) | 9.9 % (9.5% / 6.6%) |
| Quarterly take up (sq ft) | 16.1m sq ft (16.1 / 24.6m) | 3.2m sq ft (3.3m / 5.7m) |
| Supply | ||
| Completions (net delivered sq ft) | 11.2m sqft (13.8m / 11m) | 1.7m sq ft (1.5m /2.2m) |
| Total under construction (sq ft) | 75.0m sq ft (67.1m / 53m) | 15.1m sq ft (13.3m /9.7m) |
| Investment | ||
| Quarterly sales volume £m | £1,960m (£1,891m / £2,833m) | £713m (£985m/ £1,050m) |
| Average yield | 4.5% (3.7% / 4.3%) | 4.3% (3.3% / 3.9%) * |
| Prime yield (rack rented) Q1 2023 (Q4 2022) | 5%- 5.25% (4.75%-5%) Prime regional | 4.5%-4.75% (4.25%) Within M25 |
Industrial: Key investment transactions
| Property address | Town/City | Date | Building size (sq ft) | Sale Price (£m) | Net Initial Yield | Buyer |
|---|---|---|---|---|---|---|
| Chequers Lane | Dagenham | Q4 2022 | 155,000 sq ft | £33.5m | 4% | Boreal IM Ltd & 1 |
| Thorton Rd Industrial Estate | Croydon | Q4 2022 | 84,000 sq ft | £19.25m | 5.29% | Mileway |
| Silver Bullet, Hams Hall | Birmingham | Q4 2022 | 140,000 | £20m | 4.50% | CBRE Capital Advisors |
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Richard Moss
Partner, valuation & advisory – head of commercial UK funds
Head office
T +44 (0) 20 7647 7226 Email Richard
