The industrial and logistics market had an astonishing year in 2014 with record-breaking levels of occupier take-up, which in turn helped support record levels of investment into the sector. Some £6.7bn was transacted in the industrial market, with a record £4.2bn in the logistics warehouse sector, up 54% on the previous year.
This volume of capital has also helped push yields in the sector down even further, reaching 4.75% at the year end, an inward shift of 100 bps.
The investment market as a whole has seen capital flows from all over the world. But while there have been examples of overseas money targeting the sector, established investors continued to dominate and consolidate their position. Indeed, more than a third of all transactions in the logistics market by value were accounted for by just six companies.
Structural changes in the logistics sector, such as the growth of online retail and resurgence of UK manufacturing, ensured that take-up reached record levels, driving stock to the investment market, which is in short supply. Across the UK, take-up reached 32m sq ft, a rise of 73% year-on-year, and supply fell to just 22m sq ft, of which Savills classifies just 10.3m sq ft as prime.
Moreover, this gap in supply is not being adequately filled by new speculative development. While there has certainly been an upswing in development announcements, the total amount currently under construction or announced stands at just 4.9m sq ft across 22 schemes.
This supply-and-demand dynamic is starting to have implications for prime rents, where we are now seeing once-in-a-generation real rental increases, with Savills forecasting an average of 2.3% annual growth to 2019.
Although total returns will fall, with rental growth emerging in key markets, we forecast returns for the sector this year to be 12%-15%.
Richard Merryweather is joint head of investment, Savills
