28 September 2018
Warehouses remain in demand to investors and occupiers alike, says Hugh Elrington, Director at Barwood Capital, but the move towards multi-channel retailing and last mile delivery has also increased demand for small urban industrial units. This trend is expected to continue for many years, making multi-let industrial estates a highly attractive sector with both investors and occupiers.
But why? Couple the current low supply and high demand for such units with how the way we live, and shop is changing and how retailers are adapting, and you have the perfect investment case.
Barwood Capital has been analysing some of the top research reports that cover this sector from industrial property experts and, mixed with its experience, share with you below some of the highlights.
In terms of supply, we are at an historic low, mainly constrained by competition for available land. There is rising demand from an increasingly sophisticated and diverse occupier base, reducing exposure to any one sector of the economy and therefore the risk of rising vacancies. This will push rents higher and drive incentives and void rates down.
However, the sector is still looking undervalued and investors are increasingly attracted to it. We believe, as liquidity improves, and rental growth is established, yields will continue to come under downward pressure and therefore strong returns are expected.
Multi-let industrial (“MLI”) sector has distinctive characteristics offering a diversified range of units between 500-50,000 sq ft. Usually under single ownership and comprised of different sized units let to multiple occupiers. These estates are self-contained, distributed widely throughout the UK, but there is clustering around major cities (“last mile delivery”), and heavy concentrations in London and the South East.
The MLI market is estimated to be c£8bn in size by value and represents approximately 9 per cent of the UK commercial market (source BPF – PIA property data 2017).
By the end of 2017, the largest proportion of MLI floor space by business activity was that related to retailing and logistics. Gerald Eve’s research shows that trade counters, dedicated retail and business storage and dedicated logistics accounts for 43% of occupied floor space. Dedicated logistics is, unsurprisingly, a leading segment in Greater London and the South East.
The MLI sector has become more institutional in nature and has moved away from noise and waste-creating physical activity to lighter/cleaner storage, distribution and administration, with the emergence of trade counters/wholesalers as the dominant multi-let occupier.
Only a small proportion of estates are dominated by one type of business activity but having at least a 30% share is very common, according to Gerald Eve. There is a clear distinction for logistics operators, occupying an average 13,500 sq ft in 2017 vs individual traders, occupying only 2,600 sq ft. Occupier ‘clustering’ has a surprisingly significant effect on the rental profile and those estates with a dominant single occupier profile are valued on average with an extra 68 pence per sq ft.
Average rent-free periods have dropped from seven months to four months and rents have grown by 32% over the last five years.
UK MLI has had to adapt to the changing way we live and shop, as more goods are bought online. Logistics firms are the face of the transforming MLI sector, with recognisable brand power that arguably adds to the bottom line of a portfolio. There is increasing demand from a broadening occupier base due to structural changes in the SME market, fuelled by fast-growing industries. The new “retail” still holds true, but occupational demand now encompasses quasi-office and other higher value uses.
The UK average void rate was historically high, hovering around the high teens for several years until 2012. Since then it has fallen sharply to finish at 6.7% in 2017. The multi-let market has become more stable and ‘churn’ decreased from some 20% in 2014 to 14% last year, with the retention rate increasing to 84%. Higher tenant retention increases net income.
Supply remains constrained due to the dual effect of limited new development and loss of space to higher value uses such as residential. For example, industrial land in London is being lost at 260 acres per year. Occupier take-up of small and medium sized units (less than 50,000 sq ft) was up again and is now reflecting the start of fund interest in speculative development and some limited delivery of sorely-needed new stock.
LSH’s research shows that UK supply of units under 50,000 sq ft fell to a new low of 86.3m sq ft, reflecting a vacancy rate of around 4.5%. This, together with the broadening of the occupier base and continued reduction of supply, accounts for the continued rental growth we are now seeing. The rental growth curve also reflects the longer-term affordability to 20 years ago – indeed MLI still offers some of the cheapest space available in the local market.
Investor appetite increased from 2013 – 2017 to £3.6 billion transacted, over double the £1.7 billion annual average over 2008 – 2012. MLI has drastically outperformed the main property segments in recent years, with capital values increasing by some 56%(2013 – 2017) compared to offices (35%) and retail (13%). MLI units have taken on more and more retail type characteristics and drivers, with the proliferation of business and consumer online activity.
There is no doubt that the case for investing in the MLI sector is strong. Supply is at an historic low and with rising demand from an increasingly sophisticated and wider tenant base is driving rents up. The sector should continue to prove attractive for investors seeking to diversify risk through multiple units and occupiers offering longer-term rental growth prospects due to underlying increase in demand and a reduction in stock.
Barwood Capital is a big advocator of this sector and has just finalised a partnership with a leading asset management specialist that will be made public shortly. This strategy will therefore form a significant part of the 2017 Property Fund as it continues to invest in UK regional property.
If you would like more information about investment opportunities, please get in touch via our Contact Us page.