UK industrial spotlight – March 23

Welcome to our new ‘Industrial Spotlight’ which aims to provide clients with regular short insights into the industrial and logistics markets across the country including key market indicators, market commentary and deals and our view on issues that are impacting the market. 

Key market indicators

JLL prime rental growth - growth continues but at a reduced rate 

Based on prime headline rents in the markets we monitor, average prime rents for standard industrial units between 10k and 20k sq ft jumped 14.0% across GB over 2022, but growth slowed to 1.9% in Q4. Across the big box distribution market (units of 100k sq ft +) rents rose 12.9% annually and by 1.4% in Q4. 

Overall, rents look resilient and we still see rents increasing in certain markets. We will update our view on achieveable rents at the end of March. See next month’s Industrial Spotlight for new evidence on rent growth.

Third party indicators

• The MSCI Monthly Index (February 2023) reported all industrial UK rental growth of 0.5% in February, 1.6% over 3 months and 9.9% over 12 months.
• The ONS/BEIS Construction Materials Price Index for all work fell by 0.5% in January 2023 and was 4.1% lower than its recent peak in July 2022. Cement prices jumped 3.8% higher in January but prices for fabricated steel fell by 4.5%.
• The ONS’s latest Business Insights and Conditions Survey (Wave 77) shows that the top three anticipated concerns of businesses in March are energy prices (19.2%), inflation of goods and services prices (15.4%) and falling demand of goods and services (12.3%). The proportion of firms experiencing worker shortages was more pronounced in manufacturing (12.8%) and in transportation and storage (13.5%) than across all business sectors (11.9%).
• The February 2023 average of new independent forecasts for the UK economy compiled by HM Treasury shows an average GDP forecast for 2023 of -0.7% with annual CPI inflation in Q4 2023 of 4.2%. The corresponding predictions for 2024 are 0.9% and 2.5%.
• The latest IPF Consensus property forecasts (derived from 19 forecasters and based on forecasting MSCI) show an average rental growth prediction for the UK industrial sector of 2.9% this year.

Investment market is stabilising and trending stronger

The industrial investment market looks to have stabilised since Q4 2022 and in some cases we are seeing pricing and sentiment rebound as investors re-enter the market. Recent evidence to support his includes a multi-let industrial estate in north London which is under offer at a sub 4% yield and an estate in the West Midlands which is under offer at around 4.5%. In general, investors still regard the industrial/logistics sector as relatively resilient, especially in major urban markets where the stock of industrial land continues to decline. For example, new figures released this year by the Greater London Authority (GLA) show that London lost a further 355 hectares of industrial land in industrial use between 2015 and 2020, on top of a decline of 1,130 ha between 2001 and 2015.

Big Box market commentary

We have just heard that a big box new build in west London has gone under offer at £23 per sq ft, whilst secondhand units in this area are not far off this level. Across the UK the number of concluded big box transactions so far this year is well down on the previous quarter or the same quarter a year ago and we expect that the outturn for Q1 will show a slow start to the year, in part because decision-making has become more protracted. However, there remains a healthy level of requirements, especially at the larger end of the market (500,000 sq ft plus) and we understand contracts have just been exchanged for a 600,000 sq ft Built to Suit building at SEGRO Park Coventry. Sentiment remains more positive than the level of transactions might suggest.

Our point of view: business rates

According to JLL’s analysis, occupiers across the industrial sector will be hit relatively hard by the business rates revaluation and the new Rating List (April 2023) as aggregate rateable values for industrial property in England rose by 28%. This reflects the fact that industrial rental values generally posted a strong uplift between the relevant antecedent valuation dates (e.g. April 2015 to April 2021 in England). Industrial occupiers in London and the South East could see the sharpest rises, as many locations in these regions saw steep hikes in rents. Moreover with transitional relief not being effective until the increase is 30% for properties over £100,000 in rateable value, the industrial sector will have to prepare for an immediate higher rates burden, at a time when other costs (such as energy) are also rising. 

It is possible to challenge and appeal the new rates revaluation in a process known as Check, Challenge, Appeal although this is slow and cumbersome. In addition, clients should be aware that it is not too late to appeal the former (2017) Rating Assessment if they do so before the end of March. Please make contact if you want JLL to assist: peter.fullam@jll.com