Deal activity in the UK logistics sector slowed in Q2 but contributed to the best half year since 2015 according to research by Cushman & Wakefield.
In total, 6.3 million sq ft was transacted between April and June this year, 32% down on the y-o-y total and largely due to uncertainty surrounding Brexit. E-commerce continued to dominate take-up, accounting for nearly 50% of all deals, with Amazon investing in its first ‘mega’ shed (1.5 million sq ft) in the North East.
The report also revealed that developers are addressing the demand/supply imbalance through new construction, with 8.7 million sq ft of speculative space due to reach the market in 2018. As a result, Grade A availability has risen by 18% to 23 million sq ft since the beginning of the year, with the South East and North West registering the sharpest increases (59% and 52%) over this period.
Prime annual rental growth for larger distribution units returned toward the five-year average, with Wales (9.7%) and the South East (6.0%) registering the most significant uplifts. Prime yields have stabilised at 5.2%.
In the Investment market, preliminary estimates revealed that £2.5 billion worth of logistics/distribution properties changed hands in H1, down 26% on the corresponding period in 2017. Despite the slowdown, interest in the sector remains strong, particularly from overseas investors.
The report highlighted that, regardless of Brexit, UK logistics property is expected to continue to benefit from the growth of ecommerce which reached a new high in May, accounting for 18% of total retail sales.
Bruno Berretta, UK Logistics & Industrial Research & Insight, Cushman & Wakefield, said: “With less than a year before the UK officially leaves the EU, many occupiers have turned their attention towards Brexit and this has had a material impact on the deal flow in Q2, with fewer transactions agreed.
He continued: “Unless there is a visible breakthrough in negotiations, this uncertainty could extend into the second half of the year, when an official declaration outlining a blueprint for future UK-EU trade is expected during the quarterly EU summit in October. An upturn in activity is possible particularly given that enquiry levels for units of 50,000 sq ft and above have remained relatively stable in H1 2018 compared to H1 2017.”
Sam Royle of Cushman & Wakefield’s Logistics & Industrial team in Manchester, said: “Recent announcements by developers suggest that speculative completions in 2019 will remain sustained therefore increasing availability even though it is unlikely to match 2018 levels. Nonetheless, the market is far from oversupplied and new product will continue to put upwards pressure on rent levels.”
In the North West, take-up reached just over 700,000 sq ft, taking the mid-year total to 1.25 million sq ft, in what was the slowest first half since 2008. Despite subdued take-up levels, the high rental levels achieved on a number of deals is testament to the underlying strength of the market. Availability continued its upward trend in Q2, rising by 30% in the first six months of the year to 11.2 million sq ft. This has largely been driven by a combination of second hand stock returning to the market and an increase in development with 2.1 million sq ft under construction across 12 buildings as at end of June.
Sam Royle added: “Despite a slow first half to the year we expect 2018 take-up to be strong. There are a number of units under offer and significant deals scheduled to complete that will fall into Q3. There are still a number of large requirements which remain unsatisfied and we predict a strong second half to the year with improved rental growth in the big box market.”
Scott Morrison, Associate, Logistics & Industrial at Cushman & Wakefield in Leeds, said: “Recent announcements by developers suggest that speculative completions in 2019 will remain sustained therefore increasing availability even though it is unlikely to match 2018 levels. Nonetheless, the market is far from oversupplied and new product will continue to put upwards pressure on rent levels.”
In Yorkshire, take-up accelerated in Q2 to reach 1 million sq ft, taking the mid-year total to 1.5 million sq ft – the best regional performance since 2015. E-commerce retailers dominated activity with Clipper Logistics (on behalf of online retailer, Pretty Little Things) and Argos taking 615,000 sq ft and 190,000 sq ft of existing space in Sheffield and Doncaster respectively. Total availability in the region now stands at 4.4 million sq ft.
Scott Morrison added: “Recent announcements of the next wave of speculative development in the big box market across Yorkshire will help to balance supply levels after strong take up levels in the first half of 2018.”
