After four years of falling capital values, low returns and investment interest limited to specialised high-quality units in selected parts of the South East, IPD results for industrials for 1986 showed a distinct turnaround. This is coupled with several indications that the institutions are beginning to show interest in investing again in more basic industrial space.
The industrial sector of property has generally been the least popular with institutional investors. In 1980 industrials accounted for 18% of the value of institutional holdings but by 1986 this had fallen to only 12.8%. The amount of new money assigned to property investment was considerably curtailed in 1986 and the lion’s share of what was available was earmarked for the attractive retail and city office opportunities. Industrials actually suffered a net disinvestment as limited purchasing and development activity was outweighed by selling whenever opportunities arose. Only 9.5% of institutional property investment went to the industrial sector in 1986 — £72.4m out of a total of over £760m.
Within the industrial sector institutions have been selective: 40% of their money in this field is in pure warehouse properties and a further 37% in mixed industrial/warehouse or industrial/office/warehouse buildings: only 23% is in straight manufacturing units. Holdings of units with a high office content have increased substantially since 1980, and now represent nearly 18% of all their industrials, although true “hi-tech” properties still only account for 4% of the total. A number of developments of this sort are still in the pipeline, but the institutions have been relatively wary of the over-heated hi-tech market.
Institutional property investments are heavily concentrated in the South East: 56% of institutionally owned industrial floor-space and 75% of its value is sited in the area. Since 1980 new purchases have increasingly been concentrated here and in the last three years over 85% of new money has been put in the South East. Scotland accounts for less than 4% of the floorspace and Wales less than 1%. The traditional industrial areas of the North and Midlands account for 12% and 15% respectively.
In 1980 there was a very marked difference in interest in industrials between different types of investment fund. At that time unit trusts had a surprisingly high (27%) proportion of their funds in the industrial sector; pension funds had 18%; and insurance companies had only 15%. As the unit trusts have sold comparatively heavily in 1986 they have especially reduced their holdings of industrials to almost the same level as other fund types.
Despite the institutions’ reserve, a considerable amount of hi-tech space remains vacant or is still in the pipeline and demand for this has not been forthcoming. The changes in the Use Class Orders to amalgamate office and light-industrial classes is likely to depress further this market, although in practice the effect on supply will probably be slow because changes will only be possible as and when leases expire and rent reviews fall due.
The concentration of investment interest in new, specialised use and locally selective opportunities, combined with competition for vacant industrial land from retail warehouse developments, has resulted in escalating land prices in the popular areas and consequently a limited supply of basic industrial units. Until recently there was an adequate supply of vacant space as demand was stable, but much of the remaining available space is inferior in terms of either quality or location.
There are now definite signs of a revival in demand for industrial floorspace as expectations of a recovery in British manufacturing gather strength. Industrial production figures for the first quarter of 1987 are up on 1986 and there is general confidence in industrial growth. There are already signs of a new demand for modern but straightforward industrial sheds — signs which extend beyond the South East to Manchester, Wales and the Midlands. The Scottish economy was depressed last year by the fall in oil prices but these have now recovered somewhat and it seems likely that demand from the rest of the UK will have a knock-on effect on Scottish manufacturing industry.
IPD results for 1986 add fuel to the view that industrials are now due for a period of improved growth. The total return on retail properties dropped back from 12% to 9.2%; office returns crept up from 7% to 8.2%; but industrials jumped from 1.9% to 9.2%. Industrial yields have been high in a depressed market and income return reached 9.6% in 1986. At the same time capital values, which had been falling erratically since 1982, stabilised at only — 0.4%. Rental value growth picked up to 4.7% suggesting that, with increased confidence in lettings, capital values should rise this year. If the downturn in the retail sector gives investors cold feet, industrials could be the beneficiary.
Within the industrial sector the properties with high office content did notably worse in 1986 (6.2%) than warehouses (9.7%) and manufacturing units (10.4%), although the income return was fairly uniform between the types.
Capital values actually rose by 0.7% on manufacturing units but continued to fall by a full — 1.7% on properties with office content, reflecting the view that many of these properties had been over-valued. Rental value growth was still moderate in 1986 at 6.2%, but the high vacancy rates pushed out yields.
The performance of industrial properties also varied dramatically by region, with the popular South East faring worst (8.3%), apart from Scotland. The sample of properties in Wales is very small, but nevertheless comfortably heads the league. Scotland, as was to be expected in the light of the crash in oil prices, managed only a 1.2% total return, — 2.5% in real terms.
The rental value growth in the South East remained better than any other region except Wales, but stagnant demand for specialised space caused hesitancy among valuers.
Provided that institutions retain their careful approach to purchasing, 1987 could be a fruitful year in which to increase their holdings of industrial property. The key factor will be to select where voids can be minimised. They should not, however, allow caution to limit them to the same narrow choice of specialist (South East, M4, M25) properties. The opportunities will exist for funds who are prepared to be original and step outside the well-trodden areas. There are new locations to be found, perhaps along the M11, around Stansted airport, into Wales (where the Japanese are known to be interested in investing) or even the Midlands, and the North.
