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News Release

London

UK Industrial market activity and sentiment improving

Following rapidly shrinking take-up volumes in H1 09 according to Jones Lang LaSalle’s latest UK Logistics Market Report


London, 2nd October 2009 – Just 3.7 million sq ft of industrial/logistics space (over 100,000 sq ft footprint) was leased during H1 2009, 16% less than in the second half of last year and 75% below the first half of 2008 according to Jones Lang LaSalle’s UK Logistics Market Report 2009.

Richard Evans, joint head of Jones Lang LaSalle’s National Industrial & Logistics team, said: “In 2008 the strongest logistics take-up activity was recorded from retail companies, followed by industrial and manufacturing companies. However, our research shows that in H1 2009 3rd Party Logistics (3PLs) returned to dominate industrial take-up with 32% of the total volume. Despite weakening industrial output, industrial and manufacturing companies followed as the second strongest occupier group.  Retail companies accounted for the largest lease transactions in H1 2008(over 500,000 sq ft); however by mid-2009 they have nearly completely withdrawn from the leasing market.”

Richard Evans continued: “The only group to increase letting activity was waste to energy and recycling service providers, largely driven by EU legislation. Total take-up from this group in H1 2009 already doubled the floorspace taken-up during the whole of 2008 and more is expected during the second half of this year.”

The report’s findings also show that following strong speculative development during the last three years, by the end June 2009 only 1.7 million sq ft of new space had been completed with a further 3.5 million sq ft expected to be finished during the second half of the year. Compared to 2008, the volume of new completions will be 64% lower this year.

The low level of new construction is currently reducing the risk of a further rise in vacancy rates. However, Jones Lang LaSalle anticipates that the continuing higher levels of occupancy in prime markets combined with a lack of speculative development could lead to a shortage of good quality supply in key locations such as Greater London, the South East and parts of the Midlands. 

Overall, prime rents have declined over the last 12 months. Across 31 markets analysed, the average annual rental decline was 5.6% in Q2 2009. Rental declines have however started to slow during the second quarter of 2009, down by 1.5% on Q1 2009, with only seven towns recording further decreases.

“Rising vacancy rates as well as increasing requirements for lease renegotiations from occupiers who are struggling to afford high rental levels is driving the competition between landlords,” commented Cameron Mitchell, joint head of Jones Lang LaSalle’s National Industrial & Logistics team.  “The increased battle for tenants has led to highly competitive incentive packages which today can reach up to 24 months free rent period. Additionally, lease terms, especially lease length, are becoming increasingly flexible.”

Cameron Mitchell added: “Looking ahead over the short term, despite the overall reluctance to commit to new leases, the feared exodus from occupied space has so far not happened. We are now beginning to see a growth in optimism amongst occupiers and an increasing number, driven by space consolidation and efficiency, are prepared to resume their requirements.  However, these first tentative signs of a stabilising market are not anticipated to lead to a significant overall increase in take-up over the short term.”

In H1 2009, the UK recorded 50% of the total European industrial investment volume, reflecting the appeal of the UK market to investors.  Total investment in industrial property amounted to £995 million, 18% lower than in the previous half year (H2 2008) but 37% higher then in H1 2008.

According to Jones Lang LaSalle's research cross border deals accounted for 64% of the total volume, whilst they only represented one third of the total number of deals. The average deal size of cross border transactions lay just below £50 million, compared to just over £12 million for national investment deals. This cross border segment was driven by three portfolio deals representing 34% of the total volume.

David Emburey, joint head of Jones Lang LaSalle’s National Investment team, concluded: “Unlisted funds were the strongest purchaser group, accounting for 61% of the total volume. On the sale side, institutions, with 53% of the total volume, were net sellers. Unlisted developers, one of the main investment groups in recent years, accounted for 14% of purchases and sales respectively. In the first half of 2009 corporates emerged as net buyers, reversing their previous trend, as they have taken advantage of competitive prices. Notwithstanding this, their acquisitions remained limited.”

Going forward Jones Lang LaSalle expects the following:

  • Over the short term, occupier demand is expected to become increasingly driven by infrastructure access, as well as proximity to consumer markets. Relatively high vacancy rates in secondary markets will persist.
  • In order to reduce transport costs and times, reorganisation of transport flows will increasingly be the centre of attention. Logistics occupiers will increasingly seek space closer to customer markets and large gateway hubs, which will include the main container seaports and rail freight terminals.
  • Over the medium term the strategic repositioning of the UK’s retailer logistics network will continue. This will be mainly driven by changing consumer habits such as e-retailing, health/wellness products and the pressure from these that will drive demand for a greener retail offer and the most energy efficient logistics solutions.