The industrial sector has proven to be the best performing asset class within the commercial property market in recent years. The combination of low interest rates and redirection of demand from services to goods, which was accelerated by the pandemic, led to unprecedented yield compression.
However, in 2022 the war in Europe suppressed economic growth by pushing inflation and interest rates to new levels, resulting in one of the sharpest periods of re-pricing on record. Industrial property capital values collapsed by over 20%, with prime yields softening by as much as 125-150 basis points between June 2022 and February 2023.
The speed and severity of the correction triggered a significant mismatch between vendor and purchaser pricing aspirations, leading to an inevitable period of inertia. According to CoStar, UK transactional volumes in the industrial sector for H1 2023 total just £3.3bn, reflecting a 67% fall year on year (see CoStar graph below).
Investment activity remains subdued for most sectors amid ongoing uncertainty over pricing. However, in recent months, Alder King has sold two prime industrial investments which suggest that the market for mid-box industrial is improving.
In April, Alder King sold Unit K Quedgeley West Business Park in Gloucester on behalf of VP Holding Company Ltd to Columbia Threadneedle (advised by Cushman & Wakefield) for £4.7 million reflecting 5.5% NIY. The building totalled 37,110 sq ft and was single let to Vision Profiles Ltd on a new 10 year lease at £7.50 per sq ft, subject to open market review at year 5.
In July, Alder King also sold Unit C Vale Park South in Evesham on behalf of Wychavon District Council to a private property investment company (advised by Yates Real Estate) for £3.25 million reflecting 5.63% NIY. The building totalled 22,920 sq ft unit and was single let to Harrison Products Ltd for 10 years with 5 year break option (4.5 years term certain) at £8.50 per sq ft, subject to CPI (2-4%) review at year 5.
Mid-box developers and investors will be encouraged by this recent evidence which indicates that pricing has now stabilised, says Oliver Stretton, partner in Alder King’s investment team.
“Projecting forward, all eyes remain focussed on core inflation, which has proven more stubborn than the Bank of England had forecast, but it is now looking increasingly likely that inflation will fall somewhere close to the government’s 5% target by year end, meaning the pressure for further hikes in interest rates will ease.
The industrial sector remains undersupplied throughout the South West of England and with low vacancy rates and positive rental growth forecasts, we anticipate that the underlying fundamentals of the sector will persuade those investors who have been waiting on the sidelines to take advantage of a re-priced asset class and look to deploy their capital in Q4 2023.”
