UK industrial spotlight – May 23

Key headlines

• The short-term UK economic outlook has improved according to recent forecasts. GDP growth is expected to be stronger in 2023 and 2024 than formerly predicted and end-of-year CPI inflation lower.

• Despite slow occupational demand, rental growth persists with JLL prime headline distribution rents up 4.0% in Q1 and our prime headline rents for standard industrial units up by the same amount. In Q1, industrial rents rose by 1.8% according to the MSCI Quarterly Index and industrial total returns moved back into positive territory.

• Prime industrial and distribution yields are currently trending stable, having edged in by 25 bps in Q1, but a wall of capital is building up due to a lack of stock.
   

Recent economic and market indicators

• The May 2023 average of new independent forecasts for the UK economy compiled by HM Treasury point to a higher growth and lower inflation outlook for 2023 and 2024 compared with the same forecasts a month ago. The average new GDP forecast for 2023 is 0.2% with annual CPI inflation in Q4 2023 of 3.9%. The corresponding predictions for 2024 are 1.0% and 2.5%.
• According to the latest quarterly port freight statistics, in Q4 2022 the total freight tonnage handled by UK major ports decreased by 2% to 110.5 million tonnes, but the total volume of unitised traffic (containers and roll-on/roll-off traffic) increased by 1% to 4.8 million units. According to the latest statistics from the ORR, the total volume of rail freight moved in GB was 3.70 billion net tonne kilometres in Q4 2022. This was a 9% decrease on the same quarter the previous year.
• According to JLL’s prime headline rents data, rents rose 4.0% in Q1 in both the big box and standard industrial sectors.
• According to the MSCI Quarterly Index (March 2023) the industrial sector total return was positive in Q1 2023 following two consecutive quarters of negative returns. In addition, rental growth in the quarter was 1.8%, and 8.7% on an annual basis.

Big Box market

Corporate decision-making remains protracted in the Big Box market. However, among deals that JLL has recently concluded, the Orbital West refurbished warehouse in Heston, west London (113,604 sq ft) has been leased by a national drinks wholesaler at just under the quoting rent and Apollo II at Antsy Park Coventry, a new speculative development of 172,639 sq ft, has been leased by Staircraft on a 15-year lease at a headline rent of £9.25 per sq ft.

Earlier this month the Government introduced legislation to roll out longer lorries on Great Britain’s roads as part of its support for supply chains and to cut road emissions. The Government estimates the move will remove 70,000 tonnes of carbon dioxide each year. The longer trailers, known as longer semi-trailers (LST) are up to 2.05 metres longer than a standard semi-trailer and can be towed by a lorry. However, vehicles which use LSTs will be subject to the same 44-tonne weight limit as those using standard trailers. The longer vehicles have been trialled over a number of years but are now expected to be used much more widely. 

Strong investor demand for industrial continues

Investor demand for industrial stock remains strong and JLL has been active in a number of transactions that have completed in the past month or so. For example, we acted for Mileway in two acquisitions from London Metric: one comprised three multi-let estates in the West Midlands totalling 446,000 sq ft and was acquired for £46 million, reflecting a NIY of 5.8%; the other comprised four distribution warehouses totalling 198,000 sq ft which were acquired for £25.5 million. We also acted for Schroders in its disposal of two multi-let estates in Redditch and Mansfield respectively. In addition, whilst well-reported, the 30-acre Central Trading Estate in Trafford Park has only recently actually completed as has Project Athene. JLL advised the purchaser Blackstone on both, with St Modwen securing the former and Mileway the latter assets.

We are still seeing strong interest in the market, although the recent rise in interest rates have added to headwinds. Prime industrial and distribution yields, which edged in by 25 bps over Q1 2023 across the sector, are currently trending stable, but a wall of capital is building up due to a lack of investment stock. 

Spotlight on London industrial

From an investor perspective London’s industrial market continues to be underpinned by strong supply and demand fundamentals which will likely support future investment outperformance. On the supply side, recent data published by the Greater London Authority (GLA) show that London lost around 1,500 ha of industrial land in industrial use between 2001 and 2020. In addition, based on JLL’s data, the current supply of new space in units between 5,000 and 99,999 sq ft (immediately available space and under construction) equates to just two years of demand based on take-up over the past two years. On the demand side, projections of further population growth and a relatively strong economic growth trajectory for London compared with the UK (according to Oxford Economics) will likely drive demand across London’s broad base of industrial occupiers. During Covid, there was a strong focus on e-commerce and q-commerce (quick commerce) as sources of demand but now that the surge in demand from these activities has ended there is a wider understanding that occupier demand in London is driven by a wide variety of ‘sectors’. 

These supply and demand dynamics have generated significant rental value growth, which on MSCI’s data reached 10.4% per annum over the past three years and 8.3% pa over the past five. At the same time, the loss of London’s industrial land has sparked growing interest in ‘industrial intensification’, including incorporation within policy in the London Plan (March 2021). Having been much discussed over recent years, London is now seeing its first two new multi-storey / multi-level industrial developments with Be First’s Industria nearing completion in Barking and SEGRO’s V-Park Grand Union on site, both of which JLL is marketing. There are a range of other such schemes at various stages in the pipeline to follow.

Of course whilst these schemes stand out because of their innovation the vast majority of the London market is dominated by standard industrial buildings where prime rents have surpassed £30 per sq ft in many locations including Park Royal, Greenford, Tottenham, Bromley-by-Bow/Stratford to name a few. And whilst London does not have a huge stock of Big Box industrial and distribution buildings, recent lettings have pushed rents on in this market. For example, in Q1 this year a major parcel operator completed on the letting of a modern secondhand building of 203,824 sq ft at Bromley-by-Bow in E3 East London at a base rent of £25.00 per sq ft and in Q2 a national drinks wholesaler leased a secondhand refurbished building of 113,604 sq ft in Heston at just under the quoting rent of £26.50 per sq ft.

London may be the UK’s most service-based economy but the prospects for industrial and logistics property remain bright.