Demand for industrial and warehouse space is driven by the economic performance of the retail, logistics and manufacturing sectors.
At present, economic output in these sectors is below pre-pandemic levels. But the Government has announced its road map to lifting restrictions, which means an end to the third national lockdown is in sight—this should release a strong economic recovery.
This industrial market monitor focuses on London & the South East and, in the Rest of the UK, Birmingham, Coventry, Leeds, Manchester, Northampton and the West Midlands.
Key findings
Industrial take-up across London, the South East and rest of the UK’s regional markets has been declining quarter on quarter since the middle of 2017. Strong growth in rental values suggests that this is the result of limited availability particularly of new stock. Despite the headwinds and uncertainty created by the pandemic induced economic slump there are encouraging signs of increased activity in Q3 and Q4.
Availability has been on an increasing trend across all UK industrial markets but is not excessively above average historic levels. High levels of construction activity are evident across all markets; but 50% or more of the space being built is pre-let.
Rental values continue to increase in each submarket. Inner and Outer London command a rental premium over the rest of the South East; rental growth had been relatively subdued elsewhere following the Global Financial Crisis – but this has not been the case since 2015.
In the short-term nervous sentiment surrounding the effects on the economy of the pandemic lockdown led to weak liquidity in industrial investment markets in Q2 and Q3 2020. Transaction levels, however, grew back strongly in Q4. In the longer-term transaction levels might be held back by an inability to source suitable opportunities leading to further yield compression.
Strong rebounds in transaction levels and liquidity translated into outstanding levels of capital growth in the final quarter of the year. Industrial yields are now lower than both offices and retail. As a result of recent strong capital growth, the industrial sector is now at least 30% of the UK’s institutional commercial real estate market.
