UK Industrial Spotlight – June 23

Key headlines

• The latest GDP and CPI inflation statistics highlight on-going headwinds. However, the latest seaport and rail freight data highlight some areas of growth. Data on freight handled by the UK’s major ports highlight an increase in unitised freight (containers and ro-ro freight). In the rail freight market, the latest data highlight an increase in non-maritime intermodal freight moved.
• In the industrial market, one niche sub-market that continues to see strong growth is the data centre market. A recent JLL study forecasts that some 122 MW of new supply will be added to the London data centre market (including Slough) this year.
• In this more challenging and nuanced market, understanding the different market dynamics between regions and sub-regional markets and property types and sizes will become more important.

Recent economic and market indicators

• CPI inflation remained stuck at 8.7% p.a. in the year to May 2023, the same level as in April, while core inflation rose to 7.1%. This prompted the Bank of England’s MPC to raise Bank Rate by another 50 bps to 5.0%, more than the 25 bps increase widely anticipated. Market expectations now point to rates peaking at 6.0%, although some economic forecasts suggest a more modest rise to 5.5%.
• Monthly real gross domestic product (GDP) grew by 0.2% in April 2023, according to ONS estimates, after a fall of 0.3% in March 2023. GDP grew by 0.1% in the three months to April 2023.
• The June 2023 average of new independent forecasts for the UK economy compiled by HM Treasury points to GDP growth of 0.3% this year with annual CPI inflation at 4.7% in Q4 2023. In 2024 the average GDP growth forecast is 1.0% with CPI inflation at 2.8% p.a. in Q4. These forecasts still point to an expectation that CPI inflation will fall more sharply than its recent behaviour might imply.
• In Q1 2023 the total freight tonnage through UK major seaports decreased by 2% compared with the same quarter a year ago to 109.5 million tonnes, but the volume of unitised traffic remained stable at 4.5 million units. When comparing the rolling year to March 2023 with March 2022 the total tonnage increased by 1% to 446.9 million tonnes and the total volume of unitised traffic increased by 8% to 20.3 million units.
• The total volume of freight moved by rail in GB was 4.07 billion net tonne kilometres in Q1 2023, according to data from the ORR. This was a 3% decrease on the same quarter last year. Intermodal maritime saw a negligible change compared with Q1 2022 but intermodal non-maritime rose by 18%. Over the 12 months to March 2023 freight moved dropped to 15.73 billion net tonne kilometres, a 7% decrease compared with the previous 12 months. Intermodal maritime accounted for 35% of all rail freight moved between April 2022 and March 2023, but freight moved fell by 5% compared with the previous year. However, intermodal non-maritime freight increased by 3% compared with the previous year.

Data centre market

Although a specialist segment, data centres are part of the industrial market with SEGRO’s Slough Trading Estate being the largest data centre hub in Europe. This market has seen unprecedented growth over recent years and continues to see strong demand, driven by the so-called ‘hyperscalers’, such as Microsoft, Google and Amazon. Demand is underpinned by a range of drivers including the continued enterprise transition to the cloud, the growth in new technologies such as AI and the further expansion of the 5G network, but there are rising headwinds impacting supply, most notably the cost and availability of power and land availability. With much of the UK’s existing data centre capacity clustered in west London and Slough, the demand and supply balance could encourage growth in selective new locations - potentially elsewhere in London or Manchester, for example.

A recent JLL study forecasts that some 122 MW of new supply will be added to the London data centre market (including Slough) in 2023, but the key question is can supply keep pace with the level of pent-up demand?

Investment transactions increasing with more supply

The total volume of UK industrial & logistics investment transactions was just £724.1 million in Q1 2023 but we fully expect this number to be exceeded when we finalise our figures for Q2, as a steady flow of deals has continued to complete over Q2. For example, acting for the seller IPIF, JLL has just completed the sale of a portfolio of multi-let industrial properties to Westbrook for c.£70 million. In addition, other significant transactions that have recently completed include: Clarion’s purchase of two warehouse assets (totalling 312,450 sq ft) at Gorsey Point, Widnes from Mirastar; Argo Real Estate’s acquisition of a portfolio of warehouses in six locations from Tesco Pension Investments (Project Libra) for around £95 million; and DWS’s acquisition, on behalf of US capital, of a 186,455 sq ft Amazon warehouse in Wembley for £74 million reflecting a net initial yield of 3.49%.

We are seeing a bit more stock coming through which should support transactions volumes, although rising interest rates continue to challenge the market.

Spotlight on Yorkshire & Humberside

Yorkshire & Humberside is a significant industrial and logistics market, supported by a relatively large industrial economy and a network of transport infrastructure including multiple motorways (e.g. M1, M62, M18), the Humber ports and two Strategic Rail Freight Interchanges. Following strong take-up over the past three years - with annual average Grade A big box take-up of 4.3 million sq ft - this year the market has seen a deceleration in the velocity of transactions, as has the UK more widely. However, deals are still happening as evidenced this year by large transactions at Glasshoughton, Sheffield Business Park and Melton West, and demand is still alive in terms of active requirements. Rental values have also continued to rise with our estimation of regional prime achievable headline rents up by 9.5% in H1 2023 in the big box market and 7.4% in the standard industrial market. The independent MSCI industrial regional rental value index rose 2.0% in Q1.

There is a sizeable pipeline of speculative construction due to complete in H2 this year of which a leading example is Ergo Logistics’ Unity Doncaster 191, a brand-new development of 191,000 sq ft under construction adjacent to junction 5 of the M18 which is due to complete in Q4. This development is very well located with good connectivity to the M180 and Humber ports as well as to the A1M, M1 and M62. The total speculative development pipeline could bring around 3.8 million sq ft to the regional market in H2 2023 with the lion’s share of this in South Yorkshire. By contrast, there is relatively little space under construction in West Yorkshire, notably around Leeds.

One exception in this respect is Baytree Leeds, around three miles south of the city centre off Junction 7 of the M621. Here Baytree Logistics has detailed planning consent for a three-unit scheme providing 329,583 sq ft, 76,285 sq ft and 145,476 sq ft respectively. This development is due to start construction shortly and is likely to attract strong interest given an immediate lack of supply in this part of the region.

Whilst the velocity of deals in the big box market has moderated, the regional mid box market continues to see relatively strong demand and a steady flow of deals, and this market segment has attracted more developer focus over recent years. For example, at Thornbury Industrial Park, Bradford CDP is speculatively developing three units in the final phase of the park, with one unit (B, 31,700 sq ft) already taken before PC. Unit A, 41,400 sq ft and Unit C, 52,250 sq ft are due to complete imminently. This estate has direct access to both the Bradford and Leeds ring roads via the A647, with the M606 providing access to the regional and national motorway network.

As more big box supply comes to the market occupiers will enjoy a wider choice and in certain markets and size brackets this will likely take the edge off rental growth. For developers and investors, therefore, the key is understanding the locations and building sizes that are most in demand. In addition, sustainability issues (low carbon and wellbeing) are now at the forefront of decision-making for major corporates and hence buildings that address these are likely to have relatively strong market appeal.