UK Industrial Spotlight – Nov 23

Key headlines

• Recent economic forecasts point to a gradual pick-up in economic growth with inflation falling back to its 2% target level by 2025, but with Bank Rate staying relatively high in the short-term.

• Industrial rental growth remains positive. MSCI Quarterly data shows the strongest growth in Q3 occurred in the East Midlands with the strongest growth in the calendar year to Q3 registered in the North West. This data supports our view that growth in the core markets along the South East/Midlands/North West diagonal is currently the most resilient.

• The Autumn Statement includes some significant announcements on ‘Advanced Manufacturing’, Investment Zones and Freeports and planning reforms,  which, taken together, represent good news for the industrial sector. 

Recent economic and market indicators

• Recent economic forecasts point to a slow recovery in economic growth with inflation falling back to its 2% target level by 2025. 

• The Office of Budget Responsibility’s (OBR’s) November forecasts point to GDP growth of 0.6% this year, rising to 0.7% next year and then 1.4% in 2025 and 2.0% in both 2026 and 2027. These predictions are somewhat higher than the latest (November) HM Treasury average of new independent forecasts which shows 0.5% this year, followed by 0.4% in 2024, 1.4% in 2025, 1.7% in 2026 and 1.6% in 2027. 

• TThe OBR’s forecasts for CPI inflation show this falling from an annual average rate of 7.5% this year to 3.6% in 2024 and then 1.8% in 2025 and 1.4% and 1.7% over the next two years. The average of comparable new independent forecasts is 7.4% this year, 3.0% next year and then 1.9% in 2025, 2.0% in 2026 and 2.1% in 2027.

• With inflation remaining higher for longer, Bank Rate (which is at a 15-year high) is expected to fall more slowly than previously. Currently at 5.25% the OBR expect this to fall to around 4% over its forecast horizon, although the independent average suggests it could head closer to 3% over 2026-2027.   

Industrial rents still edging higher

Following publication in last month’s Industrial Spotlight of JLL’s rental growth numbers based on prime headline rents for standard industrial and logistics properties, the release of the MSCI Quarterly Index for Q3 provides independent evidence that industrial and distribution rents continue to post decent growth.  In Q3 2023 all industrial rents rose by 1.5% across GB, with standard industrial rents up 1.6% and distribution warehouse rents up 1.4%. These uplifts brought growth over the first nine months of the year to 5.1%, 5.2% and 5.0% respectively. Regionally the strongest growth over in Q3 was registered in the East Midlands (+2.2%) with the North West posting the strongest growth over Q1-Q3 2023 (+6.8%). Growth over the 12 months to September 2023 was 7.0% for all industrial, 7.1% for standard industrial and 6.9% for distribution warehouses.

Industrial investment market

In the investment market there continues to be generally more investor appetite for multi-let industrial due to the active management potential associated with rent reviews and lease events. As a recent example, the Artemis Portfolio was recently acquired by Eskmuir from the Industrial Property Investment Fund (IPIF), with JLL acting for IPIF. This portfolio is a multi-let portfolio of 10 industrial estates totalling 427,447 sq ft of industrial space with a 57% South East weighting. The assets are located in Hertford, Newbury, Milton Keynes, Oxford, Aberdeen, Gloucester, Newcastle, Cannock, Swansea and Liverpool and have a low overall vacancy rate of just 3.3%. The WAULT to break was 3.42 years and to expiry, 5.06 years. Eskmuir paid £60.1m for the portfolio reflecting a 6.25% NIY and a reversionary yield in the mid-7%’s.

With respect to the single let distribution market, Leicester Distribution Park is currently under offer to Aviva. The asset comprises a fully let park of eight units providing a total of 714,478 sq ft on 45.15 acres with significant reversionary potential. The vendor is Blackrock, and it is understood that the price is c.£102m, reflecting a 5.00% NIY with a reversion to mid-6%’s.

Nissan investment highlights further EV and gigafactory investments

This month Nissan and its battery supplier, Envision (which owns AESC), announced a £2bn investment in its Sunderland car plant. The investment will enable production of two new electric replacements for the Qashqai and Juke models which Nissan currently assembles there plus a next generation electric Leaf. Envision/AESC already operates one battery factory at Sunderland adjacent to Nissan and has a second one under construction. This investment will see a third battery factory built. Overall, the investment is expected to safeguard 6,000 jobs at the Nissan factory and safeguard or support thousands of other jobs in the associated supply chain. The investment is being supported by government funding from its Automotive Transformation Fund (ATF).

This announcement follows on from other EV and gigafactory investments including BMW’s announcement that it will invest more than £600m in its MINI factories at Oxford and Swindon, and a potential £4bn investment by the Tata Group (which owns Jaguar Land Rover) in a new gigafactory in Somerset.

Talking point: the Autumn Statement

The Office of Budget Responsibility’s forecasts that accompanied the Chancellor’s Autumn Statement show a weaker growth outlook than its March 2023 predictions and an expectation that inflation will remain higher for longer. However, because the latter results in higher tax revenues due to ‘fiscal drag’ the Chancellor effectively secured a tax windfall and was therefore able to announce some significant tax cuts, including a cut in National Insurance contributions and making ‘full expensing’, which had been announced in the March 2023 Budget, permanent. These two measures grabbed many headlines, but from an industrial and logistics property perspective there were some significant measures worthy of mention and monitoring. With this narrower focus, we think three announcements stand out.

First, the government will make £4.5bn available to support ‘strategic’ or ‘advanced’ manufacturing sectors over the five years to 2030. This includes £2bn for net zero emissions investment in the automotive sector, £975m for aerospace and £520m for life sciences. It will also provide £960m to support the new Green Industries Growth Accelerator. At JLL we are seeing growing activity from strategic manufacturing sectors, such as the development of electric vehicles in the automotive sector, and we expect these sectors to invest in more industrial / manufacturing space in the years to come.

Second, the government announced a time extension to the 12 Investment Zones (that had been announced for delivery in the 2023 Budget) and Freeports from five to 10 years and a new Investment Opportunity Fund of £150m to ‘catalyse’ investment. These areas provide a range of tax and other incentives which potential investors should be aware of when considering where to invest. Alongside this, there were four further investment zones announced with various initiatives: advanced manufacturing in Greater Manchester and the West Midlands; green industries in the East Midlands; and life sciences in Yorkshire.  In addition, working in partnership with the Welsh Government, there will be two Investment Zones for Wales; one in Cardiff and Newport and the other in Wrexham and Flintshire. 

Third, next year the government will bring forward plans to expedite major planning decisions, by allowing local authorities to recover the full cost of major planning applications in return for meeting guaranteed faster timelines. As a separate specific measure, the government will incentivise the greater use of Local Development Orders (LDOs) to ensure large developments are approved more quickly.  These measures should help accelerate planning decisions and, as a result, mitigate some of the risks and costs associated with major development/investment decisions.