Warehouse take-up rose by 27% to a record 66m sq ft in 2021 on the back of robust occupier demand, according to research from Knight Frank.
Investment volumes are expected to reach around £15.7bn for 2021, with investors putting £14.3bn into industrial and logistics properties so far this year. This would reflect a 67% surge in volume, compared to 2020’s full-year figure of £9.4bn.
US investors have accounted for 70% of overseas capital, having completed a record £6bn of acquisitions in the sector.
Competition for assets has driven up pricing, with strong yield compression seen during the year. Average transaction-based yields were 4.4% in 2021, compared to 5.2% last year. Prime assets offering a 15-year income are at yields of 3.5-3.75%.
Vacancy levels have dipped below 4% for the first time. The firm said there is around only six months’ worth of standing stock available.
There is some 38m sq ft of warehouse space under construction, but Knight Frank noted that most of this is already committed, with only 13m sq ft available.
Knight Frank added that development activity has yet to catch up with the pace of demand, with supply chain issues and longer lead times for materials driving longer construction schedules.
However, development is expected to accelerate in 2022, supplemented by a 31% year-on-year increase in planning applications.
Charles Binks, partner and head of industrial and logistics at Knight Frank, said: “The race for space continued unabated this year, with the growth in the e-commerce market, along with rising demand for advanced manufacturing facilities and other sectors such as film studios broadening the occupier base.
“The supply of new stock coming through will fail to satisfy demand given that a significant portion has been pre-committed, along with current levels of active requirements in the market. Despite the rise in planning applications, land shortages, planning hurdles and constructions costs are likely to dampen the supply-side response next year.”
Johnny Hawkins, partner in the UK capital markets team at Knight Frank, said: “Strong rental growth projections, coupled with analogous market conditions in the US and a favourable exchange rate, has drawn a wave of transatlantic capital from American private equity investors.
“Though the scope for further yield compression is limited, the strong rental growth experienced in the US is now translating to the UK market and investors are attracted by income growth prospects with occupier demand and consumer trends continuing to underpin sentiment.”
Claire Williams, industrial and logistics research lead at Knight Frank, said: “The sector’s growth has largely been driven by the e-commerce market, with online retailers, 3PLs and parcel carriers dominating activity. Competition in the occupier market has driven strong rental growth, attracting investors and driving up end values. Investors remain keen to increase their exposure to the logistics sector and this will continue in 2022, but the lack of standing stock available for purchase and the keen pricing for these units will remain a limiting factor.
“There has been significant yield compression in both core and non-core locations, and with keen pricing across the board, we expect investors to take on more risk and seek opportunities to add value.”
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