Prime Grade A big box rents in industrial and logistics spaces are expected to reach in excess of £7.50 per sq ft this year due to sustained demand for space, and a lack of new supply.
According to commercial real estate firm Colliers’ latest Industrial & Logistics Viewpoint, although the pandemic had originally stalled demand in the South West and south east Wales markets, in 2021 there was a resurgence in the sector which has seen secondary market towns become prime.
Total occupier take-up for 2021 equated to 2.6 million sq ft across 184 transactions, an increase of 13 per cent on 2020, which recorded 2.3 million sq ft across 163 transactions. In addition, investors purchased £453 million of industrial assets, the third highest volumes on record, 7 per cent ahead of the five-year annual average of £423 million.
Tom Watkins director in the firm’s Bristol office said: “The imbalance between supply and demand has seen emerging markets such as Swindon, Gloucester & Exeter turn into prime locations and rents driven up in 2021. In the south west there is a lack of supply of warehouses, and little in the pipeline to address the issue, which is resulting in the rise of rents and greater investment returns. Occupier demands in the area have been evolving, as the growth of e-commerce and demand on their supply chain has resulted in many considering a wider catchment area for their needs, as long as good transport links are available.
“In addition, investors are seeing the opportunities of long-let agreements, as we’ve seen with the likes of AXA IM forward funding £20.6million for the development of 107,660 sq ft warehouse at Central Approach, Avonmouth, which was pre-let to Oxford Instruments Plc for 20 years.”
The same deal secured a rent of £7.45 per sq ft from Trebor Developments/Hillwood and now Colliers predicts that with take up increasing for each of the past four years and with only two Grade A warehouses larger than 100,000 sq ft immediately available in the region, there will be further rental growth to above £7.50 per sq ft.
Investor appetite for industrial assets drove annual total returns to 31.7 per cent in Q4 2021 and resulted in an average net initial yield (NIY) of 3.9 per cent (MSCI), a compression of 93.5 bps when compared to Q4 2020.
Andrea Ferranti, head of Industrial and Logistics Research at Colliers added: “The performance of the UK industrial market is breaking numerous records, driven by occupiers expanding operations, eye-watering rental growth figures and investors betting on the long-term performance of the sector. Increasing rents and land values, construction costs, logistics and labour costs will not dissipate in 2022 and occupiers will need to act swiftly to secure a deal. From an investor perspective, there will be more bidding at uncomfortable levels and purchasers might need to consider speculative funding to seek higher returns due to yields being at historic lows.
“The warehouse of the future will require more highly skilled people, a robust power supply, a good pool of labour and also Grade A workspace to not only attract and retain talent but also investors. More ESG regulations will also be introduced which will further affect the sector from a cost perspective as investors seek to purchase net-zero properties and occupiers are required to adopt more sustainable technologies.”
