Recovery In Full Swing After Rollercoaster UK Industrial Sector ‘Overreaction’

It has been a wild ride for the UK industrial real estate sector over the past few years. And after a dramatic fall in 2022, the market is now in a steady recovery mode.

After years of constant rises, UK industrial values fell 21% last year, data from CBRE showed, more than any other sector. Even in the wake of Lehman’s collapse in 2008, real estate values did not fall that fast. 

But the sector that has benefited hugely from changes in how western society consumes goods is seeing the wheel turn again. 

“What we saw was a massive overreaction,” Opus Land Joint Managing Director Victoria Turnbull told the audience at Bisnow’s UK Industrial and Logistics Transformation event, held at the Royal College of General Practitioners in London.

“We were under offer on something and [following Liz Truss’ mini-budget last September], overnight, there was a 25% price chip. That didn’t go through, and there was another price chip, and the deal still didn’t go through. The price of that asset now has risen again substantially.”

Caisson iO Executive Director Mark Bowden pointed to the sale of a portfolio of London industrial assets in the second half of last year by the pension fund of oil giant Shell. In that sale, offers for the assets came in at a yield of 4.8% versus yields of 3.5%-4% at which London assets had been trading just six months earlier. Shell aborted the sale, and now the assets are likely to trade at a yield of less than 4%, he said. 

This anecdotal evidence is starting to be reflected in official valuations. CBRE said that industrial values rose 1.3% in March, the first rise since the first half of 2022, meaning values for the sector were flat for the quarter.

Mirastar CEO Ekaterina Avdonina said that for better quality assets with higher rental growth, investors were still willing to pay prices that equated to yields below 4%, with that yield rising to 5% as rents grew. For assets with average prospects, yields below 5% were still the norm, she said. 

Lenders were still keen to lend to the sector, panellists agreed, with banks Natwest and Santander and insurance company Canada Life cited by Bowden as being active in the space.

But in a less obviously booming market, lenders are being a lot more selective on the price and structure of the finance they are offering. 

“We raised funding in December, and we started that process in June,” said Tom Davies, Bloom Developments managing partner and co-founder. “Previously, that would have taken one to two months.”

Davies said the firm needed to hit certain milestones around planning and leasing before funds could be drawn down, not just to access development funding but investment funding for leased assets as well.

Investors and developers are also being far more selective about the assets they're buying. The strategy of bundling multiple assets into a portfolio and then selling it to a bigger investor is not the sure bet it was even a year ago.

“You had a lot of investors who just wanted an allocation to UK industrial,” he said. “You would see a lot of dodgier assets being packaged up, a bit like mortgage-backed securities and sold to a big sovereign wealth fund or private equity firm. 

“But there is a much closer focus on quality now. It becomes harder to hold those secondary or tertiary assets because if they are 40% vacant, you aren’t getting the income to cover your higher debt cost.” 

In terms of why values are now rebounding in the industrial sector, panellists agreed the answer lies in the fact rents are likely to keep growing in the UK, though not by as much as in the past. Davies pointed to data from LSH showing that just 800K SF of industrial space was leased in London in the first quarter of the year, below the five-year average. But rents are set to continue rising, unlike in many other real estate sectors. 

“Occupier markets are strong, the demand is there, and there are low structural vacancy rates,” Mirastar’s Avdonina said. “London has outperformed and may be slowing slightly, but the rest of the UK is catching up.”

Recent changes in the UK’s planning policy, where decisions on zoning of land have been moved from the national to the local level, are hindering new development, which will continue to push up rents, Opus’ Turnbull said.

“Construction costs have gone up by 25%-30%, the cost of debt has risen, and if you’re looking to get land allocated for commercial development, you’re in for a long road,” she said.