Rental growth in Scotland’s industrial and logistics sector will outpace both offices and retail property assets over the next five years, according to analysis from Knight Frank.
Based on forecasts from RealFor, the independent commercial property consultancy found that rents for Scottish industrial property are likely to see an average increase of 3.1% per annum between 2022 and 2026, significantly outperforming the expected growth of 0.9% and -0.3% in the office and retail sectors, respectively.
Scotland’s central belt will have higher than average industrial property rental growth, with Edinburgh predicted to see a 3.4% rise and Glasgow just behind at 3.3%.
Knight Frank said the current supply and demand imbalance for space in and around both cities only looks likely to continue, with planned speculative development not enough to meet projected requirements in the years ahead.
The findings build on Knight Frank’s 2022 Logistics Market Outlook report, which found that industrial rents across the UK are expected to rise by an average of 4.2% per annum over the next five years – led by Greater London, with an average increase of 8.7%.
Strong rental growth is also turning into increased investor appetite for industrial and logistics assets. Knight Frank research found that in 2021, industrials and retail warehousing in Scotland attracted more investment than offices for the first time in a decade, with £636 million of deals compared to £488 million.
Changes to fund allocations favouring industrials mean this looks likely to remain the case, with nearly 40% of the UK All Balanced Property Fund Index invested in the sector in Q4 2021 – up from 33.2% in Q4 2020 and just 16.4% nine years ago.
Scott Hogan, head of Scotland industrials & logistics at Knight Frank, said: “Industrials is still the hot sector throughout the UK and that is no different in Scotland. Rents outpaced other types of commercial property last year and, largely driven by the lack of new development in recent years, they only look likely to continue to do so – particularly in and around Glasgow and Edinburgh, where the supply-demand imbalance is especially acute.
“The market is, however, beginning to change and rising rents will encourage more speculative development. We are already in a new development cycle, with space coming onstream on the outskirts of Edinburgh and industrial hubs in and around Glasgow.
“While they will help alleviate some of the supply shortage, it is unlikely to be enough in the face of sustained high demand. Developers are also facing a combination of challenges including inflationary pressures, delivery disruption, and shortage of supplies and labour, which could limit activity in the short term.
“The investment side of the market will also likely continue to remain strong, with investor interest strong and yields sharpening. That said, Scotland can still provide a discount compared to assets south of the border, which may help spur deal activity in the remainder of 2022 and beyond.”
Claire Williams, industrial & logistics research lead at Knight Frank, commented: “Investors have continued to increase allocations to the sector. Despite ongoing geopolitical turbulence impacting near-term horizons, the sector’s strong occupier market fundamentals are anticipated to persist, and it is these market dynamics and the continued structural shift towards higher levels of online spend that are underpinning investors’ rental growth expectations.
“Alongside the UK funds, US private equity firms are also increasing their exposure to the UK logistics market, with a series of notable investments recorded over the past few years. Supply constraints, limited land availability, and robust occupier market fundamentals provide conviction that there is further rental growth to come in the UK and that this will drive future returns.”