The industrial market has been so strong for so long, how long can it last? An instruction placed this week may provide a new benchmark.
Australian sheds giant Goodman is hunting a development partner to forward purchase most of its industrial sites in Europe. It sees the market as fully priced and wants to capitalise and use the proceeds to invest in emerging markets that offer greater risks and the prospect of greater returns.
Despite the strength of the market, it is a bold call. The 9.1m sq ft across the 15 sites wrapped up in Project Osprey comprises mostly undeveloped space. Such is the hunger for industrial assets right now though that pension, sovereign wealth and private equity funds are unlikely to be deterred by a €472m (£337m) price tag.
It would be the latest in a string of colossal industrial deals this year. Nordic Real Estate Partners sold a €650m logistics fund in May and Prologis’ €600m pan-European Stellar Portfolio, currently on the market, are among the biggest.
In the UK, the strength of demand is reducing the amount of available space at close to the fastest rates on record. On the back of that, rental value expectations are hitting highs, helped by strong rates of job creation in the wholesale and distribution sectors.
And the success story is national. The South East may have seen the strongest rental growth – 4.5% in the year to June – but the national 3% figure was healthy too.
DTZ confirms that industrial – alongside regional retail – is offering the best commercial property investment opportunities in the UK.
Can it continue?
Last month, SEGRO chief executive David Sleath saw little reason to be anything less than bullish in the firm’s half-year results. “The limited supply of high-quality industrial and logistics space in our main markets, together with the impact of powerful structural drivers of demand for our products and sustained investor appetite for high-quality assets, should be supportive of property returns for some time to come,” he said. “We remain optimistic about our future operating performance as well as portfolio values.”
That’s not an isolated view. Prologis upped its quarterly dividend in July, while Blackstone-backed Logicor is growing at an astonishing clip.
Meanwhile, Capital Economics said this week it saw “ample” scope for further rent rises: “In real terms, rental values across the sector as a whole are currently around 6% below the level implied by a simple linear trend. And it is typical for rental values to overshoot such trends during major upswings. Indeed, our forecasts envisage that an overshoot will also be seen over the next few years.” Especially, it adds, if the economic recovery intensifies and there is no rapid pick up in the pace of development.
Total returns, the economists predict, will average 10.6% between 2015 and 2019, with markets outside the South East the spur.
Are there potential brakes? Of course. Sterling’s appreciation is heaping additional pressure on manufacturers, for instance.
But with industrial’s success story set to continue, no wonder Goodman chose to act now.
ν Should we worry about China? A devaluation of the currency and failed state interventions in the Chinese stock market are causing anxiety. I have written here before that those fears may be overblown. This week, University of California professor Benjamin J Cohen, author of Currency Power: Understanding Monetary Rivalry, put it in perspective: “In reality, China’s devaluation was puny – by the end of the week, less than 5% in all. Compare that to the euro’s 20% drop so far this year, or the yen’s 35% dive since Japan embarked on its Abenomics reform programme in late 2012.”
Closer to home, the need for the Chinese economy to return to its previous growth rate is driving an appetite to diversity risk. That will benefit the UK. Witness Chinese conglomerate Citic Group’s talks with developer ABP to buy a 20% stake in its development in the Royal Albert Docks for £100m.
damian.wild@estatesgazette.com
