Gerald Eve has said the industrial and logistics market will continue to be the most attractive commercial real estate asset class for investors, with pricing now at “attractive” levels.
The agent said the recent near-doubling in the cost of debt and sharp repricing of industrial assets pushed returns deeply negative, and below those of the other main property sectors, last year.
However, Gerald Eve argued that the short, sharp adjustment is testament to the relative liquidity and transparency of the UK’s industrial market.
John Rodgers, partner and head of capital markets, said: “Pricing looks attractive following the rapid market correction. The weight of global capital targeting the UK industrial and logistics sector pays tribute to the continued strength of the occupier market, which has defied the economic slowdown.
“The high level of liquidity includes the portfolio market, which has seen a recent resurgence in market activity. This contrasts with continental Europe, where the valuation correction is taking much longer, albeit the financial dynamics are different.”
Investment volumes have remained low – there was just £1bn of deals in Q1 2023, compared with £4.4bn in Q1 2022. Higher volumes are expected in Q2.
Gerald Eve noted that the pricing rally for industrial and logistics properties seen so far this year has been driven by conviction among “a relatively small but well-capitalised investor pool that is looking to steal a march on the market and buy through a period of reduced pricing and competition”.
A key risk is inflation, and whether interest rates will peak higher and remain there for longer than expected. That will have implications for the debt secured against industrial assets at the peak of the market, as it matures over the coming years and needs to be refinanced at new, higher rates.
There is an estimated £26bn of existing debt outstanding against the sector, and an implied expiry profile of £4bn-£5bn per annum between 2024 and 2027.
Nick Ogden, partner at Gerald Eve, said: “We are bullish on the industrial and logistics sector, which will remain in vogue as an investment opportunity compared with other CRE rivals. Increased activity means transaction volumes will pick up in Q2, but the relative lack of investment supply means they will continue to be relatively subdued.
“Our analysis suggests that strong rental growth will mostly come to the rescue for refinancing of loans taken out three to five years ago, despite higher interest rates. However, where rental growth has been limited, an equity plug may be required, but this is unlikely to impact overall market volumes or pricing to a significant degree.”
Occupationally, inflation also remains a key consideration. Research from Gerald Eve suggested that a typical logistics tenant has seen its cost base including real estate increase by around 31% since early 2020.
Josh Pater, partner at Gerald Eve, said: “We have seen a limited but increasing number of occupiers consider subletting space to partially offset rising occupational costs. However, this currently represents only 10% of the total volume of logistics space currently marketed as available. We believe this to be a short-term dynamic amid normalising post-pandemic e-commerce demand.
“Overall availability has ticked up in recent quarters but remains very limited. Thus, we continue to forecast ongoing rental growth across all UK regions, albeit at a more subdued rate than over the past 36 months.”
Elsewhere, industrial clusters such as Grangemouth, Teesside, Merseyside, Humberside, South Wales and the Solent were identified as likely areas of focus for emissions reduction projects.
John Howells, partner and head of energy at Gerald Eve, said: “The UK’s drive to net zero will require rolling investment of around £50bn per annum between now and 2050. This investment will span renewable energy, electricity transmission and storage, hydrogen and e-mobility, as well as decarbonisation of industry and real estate.”
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