Is industrial property an asset bubble or long term opportunity for investors?
The industrial investment market continues apace with buyers from across the spectrum of institutions, local authorities, property companies and high net worth individuals all active.
Deal volumes remain above the long term average and there is continued downward pressure on yields for prime stock. The market consensus is that they cannot go any lower, but is that the case?
With yields at historic lows emphasis is on detailed market knowledge to source and spot opportunities where rental growth prospects are good.
Strong levels of demand and price rises have fuelled a growth in development which may ease the supply / demand imbalance that exists in certain locations.
The increase in new letting stock is still largely in the mid and high end of the size spectrum and in many instances (particularly in the north) development of small units is still very constrained due to cost. Estates are still trading at around replacement cost, with nothing factored in for land or developer's profit.
Our occupational teams report continued healthy demand for units, with a shortage of supply of good quality second hand space. New development is partly addressing this, although not all occupiers can afford new build pricing.
The attractiveness of the smaller unit end of the market was underlined by Westbrook Partners recent purchase of the Sterling Portfolio from Mansford for £162.2m reflecting a net initial yield of 6.77%.
In the south we have typically seen yields on multi-let estates in the range of 3-4% whilst in the north good quality multi-let investments sit around the 6.5% mark, although isolated deals have been done at closer to 5%.
This sector of the market is traditionally a resilient one with limited development and the ability to attract a wide occupier base from not just the logistics sector, but also manufacturing, leisure and quasi retail uses. The broad tenant base, coupled with shorter leases provides a great opportunity for pro-active landlords to improve income, especially those taking time to understand their tenant's needs.
As rents have risen affordability becomes more of an issue for many smaller occupiers, however the lack of supply means that landlords can hold out for occupiers who can afford the additional rent and presently this is not acting as a brake on rental growth.
We are seeing a number of parties looking to take a profit, albeit buyers are understandably looking for deals with growth potential and demand for product without this falls away significantly.
Looking forward, with the August rise in interest rates combined with Brexit less than six months away, we see yields stabilising in the larger unit industrial sector and therefore total returns reducing as supply catches up with demand.
We expect that those investors who have targeted sectors of the market where the demand/supply imbalance will continue should still see strong returns, albeit this is likely to largely be from rental growth.
It is likely the factors above will contribute to a continuing positive sentiment towards this sector.