Is Industrial property a safe haven in uncertain times?
The commercial property investment market has seen a marked slowdown in activity since the turn of the year across the UK.
Most forecasts are showing modest falls in capital growth for 2019 and the recent IPF Sentiment Survey for rental growth across all sectors has turned negative for the first time since November 2012.
Amidst this rather gloomy backdrop there remains strong demand for property investments offering good fundamentals and this is where industrial property scores well.
Whilst the development pipeline has increased over the last six months it remains relatively constrained at the smaller end of the market and our occupational teams report robust demand.
The attractiveness of this market sector was underlined by Stenprop’s December purchase of 22 multi-let industrial estates across the UK from Hansteen for £67.9m, reflecting a net initial yield of 6.75%. This formed part of Hansteen`s total sales for 2018 of £294.5m, alongside acquisitions of £56.9m. The rest of the portfolio is being retained for income and value growth.
Further market activity includes Network Space’s £93m sale to Infrared Capital Partners of 25 industrial assets totaling one million sq ft, and Warehouse REIT`s recent announcement that they are considering raising £100m to acquire further multi-let industrial estates.
This has capped off a great year for industrial property with record transactional volumes. Independent data shows total returns of 15.5%.
In our last update we forecast stabilising yields and total returns reducing. This has happened. However, with tenant demand remaining strong, we anticipate continuing rental growth, albeit at a slightly slower rate as supply increases and affordability becomes more of an issue.
The strong fundamentals of constrained supply, growing demand, low physical obsolescence and pricing (especially away from the south east) at around or in many cases below replacement cost, means industrial should hold up well.
There is likely to be continued positive sentiment towards the industrial sector in these challenging times, but investors will need to be selective in their stock selection as inevitably better quality stock will be more resilient if conditions deteriorate.
On multi-let assets, looking after the estate and fabric of the buildings will become increasingly important. Creating the right environment will maximize tenant retention and new lettings in order to sustain positive rental growth.