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The definitive guide to the UK’s distribution property market.
Following the addition of 3.2 million sq ft of available space in Q4, the overall UK logistics availability rate increased again from 6.8% in Q3 to 7.1% in Q4 2019, marking the fifth consecutive quarterly increase in the national availability rate. However, despite these incremental quarterly increases, driven by the addition of both new and secondhand space, availability remains low in historic terms.
Occupiers do however now have an enhanced quality of choice on offer. The combination of new / modern stock and space under construction now accounts for 44% of the total available stock in the UK. This in stark contrast to the market in 2014 where only 16% of all availability was new or modern and very little was under construction. Whilst the availability rate increased in 2019 and is at a five year high, the composition of available supply is of a much higher quality now than seen previously. This may put downward pressure on secondhand rents in 2020.
Less speculative space than purpose-built started construction in Q4. This was the first time since Q3 2018 and perhaps represents developers’ hesitancy to start large-scale speculative projects in a quarter dominated by Brexit and the UK general election. Viewed on a rolling annual basis, the volume of speculative development fell through 2019, but remains elevated in an historic context.
Now that there is more certainty in the market, we may see more commitment from developers to commence speculative schemes. However, there are currently 50 speculative buildings under construction across the UK totalling 6.6 million sq ft with most of these schemes due to complete in 2020. So, whilst developers are likely to have more confidence in the market, they are also likely to continue to closely monitor occupier interest in existing schemes before starting new projects.
Prime yields held firm in Q4, as sentiment for prime logistics assets remained strong and much of the activity seen in Q4 was conducted off-market or with limited marketing. However, following the election result, market participants report an increase in enquiries and we could see a strong start to 2020 as some of the pent-up demand is released.
In Q4, the largest deal of the quarter was the purchase by MSREF of the Tudor portfolio (7 assets) for £241 million / 4.05% NIY, but there were a handful of standalone buildings over £50 million that transacted too. These include the purchase of Dixons Carephone’s warehouse in Newark by Cabot for £80.0 million / 5.1% NIY and DWS’s purchase of Europa Group Worldwide’s facility in Corby for £60 million.
Across the UK, we forecast an average 1.8% annual rental growth over the next five years: half the rate of growth of the last 5 years. This means that in several locations, it is not going to be possible to rely on rental growth or yield compression and income will become increasingly important to returns through 2020. As developers and investors look to maximise returns, we could see an increase in the number of former retail warehouses repurposed to accommodate industrial uses, particularly in core markets in and around London. This is especially so as employment land close to major urban conurbations is in short supply and the rental profile of both assets are converging.