Multi-let industrial estates post positive total return, says Gerald Eve

Following last year’s launch of the first ever detailed study into the multi-let industrial market, Gerald Eve has published an update on the sector’s recent performance.  The results show some promising trends in terms of investment performance, although rental growth and capital growth remain curtailed by the challenging market conditions.
The research analyses the performance of the multi-let industrial portfolios of nine key institutional landlords: Ashtenne Industrial Fund, Aviva Investors, LaSalle Investment Management, Legal & General Investment Management, PRUPIM, Valad Property Group, CB Richard Ellis Investors, F&C REIT Asset Management and Invista Real Estate Management.  The sample comprises 9,149 units and 893 estates with a combined value of £3.9bn, representing 27% of the IPD Standard Industrials universe by capital value.

Investment overview
• Total return for 2009 was 4.6%, a marked improvement on -20.2% in 2008.
• At -3.5%, 2009 marked the third-consecutive year of negative capital growth although this is a huge improvement on levels of capital decline of -24.8% in 2008.
• Negative rental growth continued to blight the sector with multi-let industrials recording average declines of -3.2%.
• Over the five year period to 2009, regionally, it was again Scotland (with 4.6% total return) which delivered the strongest figures, although London (with 3.8%) and the Eastern region (with 3.2%) also performed relatively well.

Occupational overview
• A diverse tenant mix remains a key characteristic of multi-let estates, with no one sector accounting for more than 16.5% of rental income.
• Northern regions tend to be more exposed to general manufacturing sectors while London and the Eastern region are more heavily exposed to wholesalers.
• Local and regional businesses continue to make up the majority of the tenant base of multi-let industrial estates.

Richard Lines, Partner and Head of National Investment at Gerald Eve, comments: “Despite the continued uncertainty affecting the property sector as a whole, activity in the multi-let sector continues relentlessly. Fundamentally investors remain attracted to the sector for its attractive pricing, higher income yields, diversity of tenant risk and the ability to add value through asset management.”

The latest update to the research provides a more thorough analysis of tenant churn, allowing investors to make informed assumptions about projected income, the possibilities for extended/renewed lease terms and potential void rates. For those estates for which we have both 2008 and 2009 data:

• 81% of units experienced no change in their occupancy status; 73% have remained occupied by the same tenant and 8% remained vacant during the course of 2009.
• In 2009, in the event of a break coming up, 66% were not exercised.
• For the same period, in the event of a lease expiry, 61% of tenants renewed leases on existing premises.
• 14% of vacated units were subsequently re-let to different tenants, whereas 26% of vacated units failed to secure new tenants.

Sally Bruer, Partner and Head of Industrial Research at Gerald Eve, comments: “Having delivered the first ever detailed study of the Multi-Let sector last year, we are especially pleased to have enhanced our research in this area. We believe that our research adds value to our investor partners by providing a unique analysis of this challenging asset class.”

Chris Nicoll, Head of Industrial & Distribution at F&C REIT Asset Management, comments: “We are pleased to be involved in the Multi-Let project with Gerald Eve. Multi-Let is an excellent tool to help better understand this challenging asset class and there is nothing else like it in the market. We think that this will not only help us to better understand our multi-let industrial properties in an appropriate context but also help us to shape our strategies for the future.”

Outlook for the future
With exposure to such a diverse range of tenants and with such a broad regional spread, multi-let industrials are a true reflection of the UK’s small and medium sized enterprise culture.  Future occupier market conditions – and therefore the outlook for occupier demand, potential for rental growth and change in void rates and tenant default – will be linked to expectations of economic performance.  Based on forecasts for economic performance, we expect to see the following trends emerge from the 2010 data:

• South Eastern and London regions to perform strongly
• East Midlands, Wales, North East and Scotland to under-perform as the impact of Government spending cuts and economic uncertainty take hold

Longer-term, Gerald Eve predicts the sector to make a slow and steady recovery in line with predictions for the wider economy and currently expects the following investment performance for the four-year period 2011-2014:

• Total return:  9.6% pa
• Capital growth:  1.5% pa
• Rental growth:  1.6% pa