The UK logistics & industrial sector will be largely driven by ongoing Brexit trade talks which could impact manufacturing and the growth in eCommerce, according to a report by Cushman & Wakefield.
The report predicts that the demand/supply imbalance in the logistics & industrial sector, compounded by a severe lack of developable land and upward pressure on land values, could led to vertical schemes. This type of development has already been seen in a number of European cities with developers planning similar schemes in locations like Heathrow and Park Royal in London.
The research revealed that annual take-up in 2017 was on par with 2016 at 26.9 m sq ft, although it was 8% below its five-year average. There is currently around 5.6 million sq ft of speculative space under construction and due for completion this year which is set to take Grade A availability to a six year high of 20.6 million sq ft.
On a regional level, however, availability of grade A space varies significantly, ranging from over 6.5 million sq ft in the South East to 266,000 sq ft in the North East. The demand/supply imbalance also continued to put pressure on prime rents and in particular, for larger sheds. Rents grew the fastest in Wales (over 13%) and the slowest in Yorkshire & Humber (2.3%).
2017 was a positive year for the Welsh logistics & industrial market. Although take-up didn’t match its 2016 levels when it reached 3.3 million sq ft, at 2.8 million sq ft, it still exceeded it 5 year average by 5%. Despite concerns around the impact of Brexit of the sector, demand from manufacturing remains strong, accounting for the largest share (40%) of take-up in the region in 2017.
Similar to other UK regions, the Wales logistics market has to contend with a lack of available Class A space – amounting to just 450,000 sq ft in Q4, or 8% of total stock. This shortage reflects primarily a lack of developable land in core submarkets around Cardiff. Outside these areas, interest in new development is limited due to difficulties in reconciling building costs with low rents. As result, matching demand and supply remains the biggest challenge, with several requirements remaining unsatisfied at present. Some investors are taking advantage of the demand/supply imbalance by upgrading stock – as re-letting prospects are generally good. The abolition of tolls on the Severn Bridge which is scheduled for 2019 is also expected to improve Wales’ attractiveness as distribution/manufacturing base.
Rob Ladd, Partner and Head of Logistics & Industrial at Cushman & Wakefield’s Cardiff office comments: “Demand remains steady however the supply of industrial and logistics properties across South Wales continues to diminish. Whilst South Wales continues to experience both rental and capital growth primarily as a result of this lack of supply the viability of speculative development is such that we are unlikely to see significant new development during 2018. As a result Wales is in short supply of properties which are suitable for modern technologies which is a concern if the region is to remain an option for manufacturers of the future.”
Cushman & Wakefield forecasts that returns for the logistics & industrial sector in 2018 would be moderate, but the continuing diversification of the sector to include multi-level, mixed-use, and urban depot solutions should create opportunities for a wide range of investors.
Bruno Berretta, UK Logistics Insight & Research at Cushman & Wakefield said: “Brexit negotiations will undoubtedly influence real estate decision-making among many occupiers, notably those with European supply chains and regions which have strong trading links with the EU. However, the growth in e-commerce will continue to benefit the sector, as internet sales account for an increasing proportion of overall retail sales.
“Prime yields also continued to tighten last year across most UK markets. With the gap between prime yields in West London and the risk-free rate, investors who remain keen on this sector, may turn to new opportunities that are likely to emerge this year.”