Prepare For The Midlands Industrial Bonanza To Plateau
The Midlands' shed scene may be plateauing, as a surge in speculative availability begins to kick in.
That is the warning from Peter Lowe, BMO Real Estate Partners' director of property funds.
BMO, which manages assets of £6.2B for clients across Europe, said that industrial property will still be the UK real estate sector’s star as before, but warns against overexuberance.
Data published by BMO suggested the return on distribution floorspace from 2018 to 2023 is on track to meet 6.5% annual growth. This compares with all-property growth of 3.5% and retail property growth of just 1.3%.
“Demand remains encouraging but does feel to be plateauing a little in certain locations, particularly at the larger end of the market,” Lowe said.
“Agents in certain geographies suggest that there is some concern that supply in the larger 300K SF-plus size bracket is proving difficult to shift, with this size also popular with design and build occupiers who may not wish to, or have to, commit in this capacity."
The £523M BMO UK fund is weighted toward industrial property, accounting for around 34%, ahead of offices on 30%. The West Midlands accounts for around 12% of the portfolio.
“We have seen a slight tick up in availability rates at the overall national level as the inevitable supply response to market performance, which has been the standout sector for the last five years or more, has started to come through,” Lowe said.
Lowe pointed to localised peaks and troughs, as the pattern of speculative supply settles into varying market conditions.
According to Savills the volume of speculative Grade A floorspace available in the West Midlands has doubled since this time last year: in Q3 2018 it was 1.5M SF, today it is 3.1M SF. Total supply has also surged spectacularly, from 5.2M SF to 8.5M SF, up 63% in just one year.
“The East Midlands region is one area where we have seen a noticeable increase in availability levels over the last year, driven in part by some spec construction in the smaller unit size bracket,” Lowe said.
“Nonetheless it remains the heartland for big-box logistics in the UK, with take-up remaining at above average levels in Q2, and with the region responsible for around a third of all UK take-up over the period.Despite some near-term supply-led pressures on performance, which we feel is more likely to moderate growth rather than lead to a vacancy-led downturn, we continue to favour the region on account of the overall quality of the offer."
Lowe said that his expectation is for “moderation in rental growth but no collapse in demand or explosion in vacancy.”
With vacancy rates of 5% to 7% still being low by historic standards, Lowe said the likely outcome is “perhaps some additional bargaining power for those occupiers able to accept relatively standard units in areas of patchy demand, or those able to remain relatively geographically mobile”.
