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/sfAverage market rent growth, annual
Milton Keynes£10.7216.4%
Liverpool £6.7414.9%
Tees Valley & Durham £6.1113.8%
Swansea£5.5411.9%
Hertfordshire£13.0411.8%
Source: Cluttons, MSCI

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 statedUKLondon &
South East
Distribution, multi-let estates and specialised industrialCurrent 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 yield4.5%
(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
Source: Cluttons, CoStar * Yields for industrial in South East

Industrial: Key investment transactions

Property addressTown/City
Date
Building size
(sq ft)
Sale Price (£m)Net Initial YieldBuyer
Chequers LaneDagenhamQ4 2022155,000 sq ft£33.5m4%Boreal IM Ltd & 1
Thorton Rd Industrial EstateCroydonQ4 202284,000 sq ft£19.25m5.29%Mileway
Silver Bullet, Hams HallBirminghamQ4 2022140,000£20m4.50%CBRE Capital Advisors
Source: Cluttons, CoStar

The information provided in this report is the sole property of Cluttons LLP and provides basic information and not legal advice. It must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without the prior written consent of Cluttons LLP. The information contained in this report has been obtained from sources generally regarded to be reliable. However, no representation is made, or warranty given, in respect of the accuracy of this information. Cluttons LLP does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication.

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Director of research and insights

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Gráinne Gilmore, director of research & insights, Cluttons
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