At least 7.3m sq ft of industrial units of more than 50,000 sq ft will be delivered speculatively across the UK in 2018, compared with only 5.9m sq ft of speculative starts in 2017, according to LSH.
In the big box logistics sector – for units of more than 100,000 sq ft – core locations will remain prominent but the search for value from both developers and occupiers is creating new desirable areas, including along the M40, A14 and potentially South Wales.
The focus of speculative development has also clearly shifted towards the smaller end of the market.
While the amount of available logistics space under construction has more than halved from 2016, development activity in the medium-sized sector of between 10,000 sq ft to 49,999 sq ft has trebled over the period and now stands at more than 3.2m sq ft.
The investment market also performed well, which according to LSH, reflects the insatiable appetite across all sub-sectors and asset qualities.
A record £7.5bn of industrial assets changed hands during 2017, up 44% on 2016’s total and smashing 2014’s previous high of £6.7bn.
The research highlights that much of the rationale for investment into the sector is predicated on continued rental growth but there is a growing sense that aspirations on future growth have, in some locations, run ahead of what occupiers are ultimately prepared to pay.
Prime rents were up by an average of 4.9% in 2017, secondary rents up by 5.1%.
LSH’s forecast points to average annual UK industrial rental growth of 3.5% over the next five years, compared with a more modest 1.9% for all UK property.
Occupiers are showing strong appetite for quality facilities – grade A space accounted for 30% of UK take-up last year, the second-highest proportion on record after 2016.
With value becoming harder to find, developers will increasingly have to consider innovative approaches to deliver much-needed stock to the market.
This is especially pertinent to small unit schemes, where supply is critical. Fund appetite in this size bracket may be limited due to the nature of occupier covenant, but there is nonetheless a significant opportunity to develop units for freehold purchase.
In dense urban areas, in particular London, intense competition for sites from residential is likely to drive a closer combination of the two uses.
Alex Carr, director of Industrial Capital Markets, said: “Considering the price increases we saw and the volume of assets traded, 2017 was nothing short of spectacular.
“While a degree of further yield compression cannot be ruled out, much of the rationale for investment is predicated on rental growth continuing to feed through.
“Although many assets are perceived to be highly reversionary, investors should be diligent over their aspirations on future growth.
“There are undoubtedly pockets of opportunity to exploit over the coming years. For those seeking asset management angles, we expect a strong focus of demand on obsolete but well-located stock, while areas in close proximity or benefiting from planned road infrastructure improvements will be of interest to development funders”
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