Rental growth in the UK industrial & logistics sector is set to continue to outpace both the office and retail sectors over the next five years, according to the latest research from global real estate advisor Knight Frank.
Knight Frank’s 2022 UK Logistics Market Outlook Report reveals that industrial rents are expected to rise an average of 4.2% per annum over the next five years, compared with 1.7% per annum for offices and 0.6% per annum for retail. The sector’s strong occupier market fundamentals and persistent growth in online sales are expected to continue to drive rents.
Knight Frank expects Greater London to continue to lead the UK market, with rents forecast to rise at least 8.7% in 2022, and could move considerably higher in areas of intense demand and short supply. This follows a record-breaking year in 2021 where prime London rents rose 25% (units over 50,000 sq ft) and smaller units recorded even stronger growth, with prime rents for units sub-20,000 sq ft rising 56% over the year.
Investors are increasingly betting on continued growth by increasing fund allocations to the sector. 39.7% of the UK All Balanced Property Fund Index was invested in the sector in Q4 2021, up from 33.2% in Q4 2020 and just 16.4% nine years ago.
Strong confidence in occupier demand and intense competition for assets is seeing some investors move up the risk curve. Investors are increasingly looking to drive returns through rental growth via new lettings, re-gears and rent reviews on assets with short lease lengths, which has consequently seen assets and portfolios with unexpired lease terms under three years recording strong yield compression between 2019-2020, from 6.9% to 6.0%.
Knight Frank also predicts that macroeconomic and geopolitical uncertainty will prompt many investors to hedge against inflation by favouring less volatile long-lease strategies which deliver stable income over 20-year-plus horizons. This polarisation between short- and long-income strategies is creating opportunities in the market for assets with 10-20-year lease terms. These assets have recorded the least yield compression over the past two years and delivered resilient returns matching those achieved through short-income strategies. With yields continuing to compress at either end of the lease length spectrum, the potential returns in these middle quartiles will attract a growing number of investors.
Claire Williams, Industrial & Logistics Research Lead at Knight Frank, commented: “The strong performance of the UK industrial market, especially when compared to other sectors, shows no sign of abating over the coming years. Competition in the sector is high, with a broad church of domestic and international investors showing faith in its resilient underlying fundamentals.
“Looking ahead, confidence in continued rent growth, and increasing macroeconomic volatility, will lead to a polarisation in investment strategies, further compressing yields in long- and short-income strategies. The middle ground, which will see investors target assets with unexpired lease lengths of 10-20 years, presents opportunities for attractive returns.”
Commenting on the South Wales industrial property market Neil Francis, head of Logistics & Industrial at Knight Frank in Cardiff, said: “The strength of the industrial market in Wales certainly echoes the UK-wide picture. The exceedingly strong volume of transactions at the end of 2021 have continued with good levels of demand so far this year and the increase in new build levels in South Wales should enable the market to meet demand better as the year goes on.”