Will it be a good or bad year for the sector? Noella Pio Kivlehan asks six industry experts for their growth and demand forecasts
Andrew Griffiths, ?managing director, ?Prologis UK
The industrial property sector is showing positive growth in terms of both occupiers and investors. The rapid growth of e-commerce, the reconfiguration of supply chains and the need for companies to reduce carbon emissions indicates that this momentum will continue into 2014.
Many occupiers’ requirements are highly specialised and we predict that most new facilities will continue to be agreed on a build-to-suit basis. However, continued improving demand and interest from investors could also bring forward some further speculative development.
Richard Moffitt, ?head of national industrial investment, CBRE
The UK industrial investment market is witnessing a resurgence of money entering the sector. Prime yields have moved inwards and there is evidence that yields will continue to harden over the coming year due to the interest from investors competing for limited stock. The gap between the strong markets in London and the South East (where prime yields are at 5.75%) and the wider UK is starting to close. The regions are now experiencing yields of 6% for prime assets and 7% for good secondary assets.
Looking forward, occupier demand for larger, bespoke premises will have a major influence on the market. With the e-tailing market set to account for 15% of total retail sales in 2020, occupiers will increasingly be looking for logistics properties to meet this demand. This trend will polarise the market with modern, well located properties focused on express delivery having the advantage over older assets, which may in time prove obsolete.
Increased occupational demand coupled with increased investor appetite means that industrial assets look well placed for strong rental growth prospects. The cost of relocating is on the rise and, with stock levels remaining low, there are significant opportunities to regear lease structures, offering further capital growth.
Tessa English, senior research analyst, Jones Lang LaSalle
Good-quality buildings will remain in short supply and the availability of land for industrial will be very constrained, especially in the South East. We expect to see growing demand from food retailers looking to acquire new dotcom warehouses to cater for online orders, and discount retailers will also be active.
Nigel Godfrey, senior vice president, UK & Spain, Gazeley
We will continue to see strengthening occupier demand coupled with a limited supply, which will lead to an uptick in build-to-suit developments. Demand from food retailers, e-tailers and their supply chains will continue throughout the year. There will be a limited return of speculative development in some prime locations.
Also, we will see pressure on rents, which will lead to some modest rental growth accompanied by further cap rate compression as investors aggressively chase product.
There is a perceived scarcity of development land for large-scale industrial warehouses that are capable of securing planning permission in the locations that customers want.
All in all, it looks like it’s going to be an exciting five years.
Jeremy Greenland, managing director, Evander Properties
There will be a considerable amount of speculative development next year in heavily undersupplied markets. It is likely to be the big players such as Prologis and SEGRO that will develop the larger sheds – these players can view a percentage of spec as portfolio-strategic. There is likely to be a degree of pension fund-backed spec activity in the smaller and mid-sized markets. Most of the decision-making individuals experienced the last cycle, so we think decisions to build spec will be measured and well considered. Land markets are likely to become more competitive due to better availability of finance as institutions climb the risk curve seeking returns. Opportunity funds are likely to struggle due to higher IRR requirements.
However, I don’t believe we will see much evidence of consolidation in the occupier market, but in time the larger developers may become acquisitive as there is a large population of small trader-developers.
Bill Page, business space research specialist, Legal & General
Occupational decision-making will strengthen and, while most deals will remain churn, expansionary take-up will increase. The trade sector will continue to differentiate from standard industrials. These occupiers are trading well and some consider themselves to be behind the curve in accommodation and will attempt to rapidly grow share.
Tightness in supply will be more evident but will remain specific, with overall voids elevated. Where choice is limited, occupiers will either drop a grade or compete more keenly on specifications within the same estates.
Pressure to develop speculatively will increase, and spec building will be focused on markets in the South and Midlands. However, investors will remain wary of building out multiple units without careful phasing. The speculative development of smaller units to sell to owner-occupiers may emerge.
Rental growth will be more widespread. We expect between 1% and 2% rental growth at the national level. In undersupplied locations, however, a landlords’ market will return, driving much stronger growth. Where rent-frees were previously 12 months on a five-year lease and are now nine, we expect them to be six by mid-2014.
