Source: Office for National Statistics
Source: Colliers International / Note: Units sized 100,000+ sq ft
Available supply remains well-balanced at 34 million sq ft, but this balance could potentially change quickly as we expect several large schemes to be acquired over the next few months. Given that the five-year annual average take-up is 30.4 million sq ft, this suggests that there is 1.1 years’ worth of supply in the market.
Speculative deliveries – New supply
Source: Colliers International / Note: Occupier deals 100,000+ sq ft
Developers have largely stuck to their development programmes and completed 4.3 million sq ft of speculative space over H1 2020 with a further 5.2m sq ft scheduled for completion this year. This will total 9.2 million sq ft, assuming all schemes will complete on time. Next year, we expect the amount of new speculative space delivered to fall as the sector witnesses a cyclical slowdown in the development cycle.
New speculative supply continues to be absorbed. A recent example saw Colliers advising Tritax Symmetry on the disposal of 334,760 sq ft of speculative space (Unit 5 Central M40 in Banbury) to Great Bear Distribution (pictured).
As a result of this strong demand, rents are still holding firm as landlords and occupiers assess the impact of the trajectory of the economic recovery on their businesses. In this respect, some landlords have shown a higher level of flexibility when stipulating leases, in some cases providing an extra month rent free per 10-year term certain.
The industrial and logistics sector remains the favourite sector from a fund performance perspective and we do not expect this to change in the immediate term. Our forecasts reflect the underlying strength of the sector. Colliers expects annual rental growth of 0.8% in 2020 and then a pick-up to 1.7% in 2021. London and the South East will see slightly stronger growth than Rest of UK and Distribution Warehouses. At 0.7% y/y, the industrial sector is the only property sector in which total returns growth is maintained in 2020. Total returns growth will accelerate to 6.0% in 2021, and average 5.6% over the five-year forecast horizon.
While the first half of the year saw a slowdown in activity for the smaller end of the market, SMEs are struggling to remain acquisitive. We expect this demand gap to be filled partially by larger companies (third-party logistics providers, parcel couriers, online retailers) looking to increase capacity within their supply chains as a result of increasing online sales.
A survey, undertaken by Colliers, of over 240 occupiers, landlords and real estate professionals with an estimated real estate asset value under management in excess of $900 billion, has revealed that 76% believe the uptake of cleaner technologies and COVID-19 pandemic have accelerated customers being affected by higher prices for home deliveries in the future (Question #1). In addition, 52% of respondents (Question #2) believe that lease lengths will not continue to shorten. This may not be a clear result given the split, but occupiers may find it harder to adjust their operational capacity.
The UK government has pledged to become carbon neutral by 2050. This could increase the cost of deliveries - would you expect this cost to be passed on to the end consumer?
During COVID-19, occupiers have required extra flexibility to react to unpredictable peak times. As a result, do you expect warehouse space lease lengths to continue to shorten?
Given the growth of e-commerce, do you think that there is enough stock to accommodate extra demand for last mile logistics in the UK?
To conclude, the industrial distribution sector is facing several challenges, especially the lack of development land in densely populated areas and increasing pressure to reduce carbon emissions. Finding the right warehouse stock in the right location is one of the biggest challenges for occupiers, particularly nowadays as seasonal peaks are becoming more unpredictable.
This finding is also reflected in our survey where the overwhelming majority of respondents 89% stated that the UK market does not have enough last-mile stock to fuel this growing demand (Question #3). This supply and demand issue, coupled with spiralling delivery costs and sustainability pressures will potentially have a domino effect, increasing the cost of items for the end-user-the customer.
The million dollar question that remains is whether the consumer will be willing to pay extra for their home deliveries.
Head of Industrial & Logistics