Multi-let industrial: is this the ideal investment for both growth and sustainability?

By Danielle Sheppard

E-commerce is driving demand from a wider range of tenants on multi-let industrial (MLI) estates, many of whom would have previously taken space in more expensive offices and retail, and this is positively affecting occupancy in MLI and urban logistics (I have previously written about this and you can read the full article here). This has contributed to the strong rental growth we have seen in recent years, as well as the historically low void rates. 

Despite this increase in demand, there is a lack of new development, which Barwood believes uniquely positions this sub sector to outperform over the next five years and beyond, making now an ideal time to invest both from a capital and rental growth perspective.  It’s particularly attractive for investors looking to tap into a growth market while also making a positive environmental impact given the low costs involved in bringing the real estate up to modern standards through repurposing and as such preserving embodied carbon.

Under normal circumstances the current supply and demand dynamic would cause an increase in small-unit schemes being delivered as developers take advantage of the market dynamics to supply new units to fill the void.  However, MLI has witnessed a significant depletion of new developments owing primarily to rising building costs and an increase in the demand for larger logistics.  The result of this is that landlords can have genuine confidence in ongoing rental and capital growth when investing in multi-let and smaller urban logistics in areas of limited supply because it is unlikely that those supply dynamics will change in the short or medium term.  Furthermore, this means that the repositioning of existing stock provides an excellent opportunity to provide good quality, functional space, all whilst having a positive sustainable impact by improving the energy efficiency of the real estate.

Build costs for units of sub 10,000 sq ft are often more than £120 psf, however, for units over 80,000 sq ft it can cost substantially less – circa £80 psf.  In addition to this, the growing need for logistics in the UK has resulted in a decrease in the arbitrage in rents between smaller and larger industrial property, the result of which is that it is frequently more profitable for a developer to build big box logistics rather than a multi-let scheme.

Additionally with rising build costs and the increasing cost of land in order for developers to make smaller schemes viable they must have a high density, often with restricted parking and loading. As a result, many occupiers continue to favour well-maintained second-hand, lower density schemes, which reduces the disparity in rent between newly constructed and second-hand properties. 

MLI units provide a space for SMEs to prosper, however reduced supply is having a negative effect on growth.  In September 2022, a Savills report stated that had supply in the sub 100k sq ft market not been so restricted, an additional 31,600 jobs and 26,700 indirect employments would have been generated, resulting in an annual gross value added of £1.7 billion. 

In the short to medium term, these market dynamics are unlikely to change as construction prices remain stubbornly high, leading to an opportunity for savvy investors to purchase regional MLI estates, where rental levels make development of new stock unviable. Estates are still available to purchase for less than replacement cost and investing as little as 5–10% of the purchase price can repurpose and modernise the units to include upgrades to EPCs. This strategy preserves embodied carbon and improves energy efficiency, both of which benefit the environment. With investors currently searching for growth together with investments with a positive environmental impact, we think multi-let will continue to be a compelling sector that outperforms over the next five years. 

Barwood Capital and Caisson iO have formed BCCIM, a light industrial and urban logistics specialist manager with a team that has more than 100 years of combined experience in this sector, consistently delivering returns that outperform the MSCI Industrial index.   BCCIM currently manages two multi-iet and urban logistics funds with a combined AUM of £100m.  The team is currently fund raising for additional equity in the Urban Industrial Income Fund and if you would like to understand more about the opportunity, please contact me or the Investor Relations team.