Industrial market update Q4 2021

Rental growth continues to rise, hitting 7.2% a year in Q4 2021. Industrial space under construction is at the highest level ever recorded.

Yields fall as sales volumes soar

Industrial yields continue to fall, especially in the South East where hot spots such as Park Royal and Wembley are achieving <3%. Meanwhile, quarterly transaction volumes remain high and at a wide margin above the trend rate pre-covid. It is notable that whilst the investment value was high in Q4, the number of deals was thinner, reflecting a shortage of investment grade stock. This, as opposed any lessening in investor appetite, has the potential to limit transactional activity in the future.

Figure 1. Industrial yields, %

Source: MSCI

Strong rental growth, for now

Rental growth for the industrial sector ended the year at 7.2% (Table 1). Such strong growth raises questions about how far rents can go before occupiers experience affordability constraints; something made more acute by rising energy costs. There have certainly been cases of London occupiers moving out to M25 locations such as Watford in the hunt for more affordable space, but for the most part there remain a wealth of occupiers with active requirements—even with currently high rent levels and with very limited availability (the vacancy rate across the UK being just 2.8%). This supply-demand imbalance means rental growth is likely to continue for now.

Manufacturing continues positive trend

Manufacturing production, as measured by the IHS Markit/CIPS UK manufacturing PMI, accelerated for the third month running in January 2022 and has now been above its neutral position for 20 consecutive months. This is despite a new wave of covid restrictions hitting exports at the end of the year and supply chain issues stymying growth. This is a positive sign of industrial demand.

Construction breaks all records

Both in terms of quarterly data, and 4-quarter rolling averages, construction levels have never been so high. Of course, a very small number of very big sheds can easily swell construction totals, but even with this caution there does seem to be a case of supply rising to meet demand.

It remains to be seen whether increased construction completions will serve to counter that imbalance to the extent that rents stabilise. Our sense is that rental growth will continue in the short-term despite increasing supply.

Figure 2. Under construction, m sq ft

Source: Cluttons analysis of Costar data

Sustained investor demand

While there is some limited evidence that investors are looking to sell, ways to recycle capital back into the real estate sector are somewhat limited, and strong rental growth is helping investment deals stack up. Many investors are now finding themselves accidentally under-exposed to the sector and will need to rebalance portfolios to bring themselves back in line with the market. Given these conditions investor demand is set to continue this year, alongside significant interest in alternative sectors like residential and specifically build-to-rent.

Figure 3. Total UK Industrial sales, £bn

Source: Cluttons analysis of Costar data

Table 1: Headline market data Q4 2021

Source: Cluttons, Costar

Table 2: Notable investment transactions

Source: Cluttons, Property Data, Costar

Commercial market update Q4 2021

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