Industrial Market UK Tracker jll.co.uk/industrial Spring 2017
Our industrial agents (multi-let) n o i t c u d o r t In Welcome to our new UK Industrial Market Tracker, which aims to monitor and evaluate what is happening in the market with a sharper focus on standard industrial buildings rather than the large-scale logistics buildings that we cover in our separate Big Box report. Earlier this year, our UK Real Estate Investor Confidence Survey Q4 2016 highlighted huge investor interest in the industrial/logistics sector, with 60% of investors saying this was the sector that would see the most interest in the coming six to 12 months. We believe this new Tracker report sheds some light on why this interest is so strong. In this first edition we start by looking back at market conditions over 2016 including a dedicated demand and supply survey of JLL s Industrial team across the country, plus an analysis of speculative development, rental growth, yields and investment performance. We then look forward and set out our expectations for 2017 based on the same key indicators. We hope you find this Tracker a useful guide to market conditions. Despite some economic and political uncertainties, we think it highlights that industrial market fundamentals are strong. We believe the market will prove resilient and continue to offer opportunities for developers and investors. In addition, we hope that corporate occupiers with requirements for industrial property will also find the Tracker a useful study to help inform their decision-making. Andy Harding Lead Director UK Industrial & Logistics Tim Clement David McGougan Ravinder Cheema Lauren O Toole +44 (0)207 087 5303 Southampton +44 (0)238 038 5628 +44 (0)115 908 2132 +44 (0)113 235 5221 Chris Knight Sean Fraser Carl Durrant Andrew Lynn +44 (0)207 087 5629 Southampton +44 (0)238 038 5633 +44 (0)121 200 7147 +44 (0)161 828 6415 Shaun Rogerson Tim Western Steven Jaggers Richard Johnson +44 (0)207 087 5307 Exeter +44 (0)139 242 9305 +44 (0)121 200 7188 +44 (0)161 238 7416 James Miller Kye Daniel Tom Price Ben Watson +44 (0)207 087 5764 Exeter +44 (0)139 242 9307 +44 (0)121 634 6537 +44 (0)161 828 6436 Hugo Jack Giles Weir Robert Kos +44 (0)207 087 5353 +44 (0)117 930 5782 Alexandra Fitzpatrick Phoebe Farrell Deborah Bryant-Pearson +44 (0)207 399 5951 +44 (0)117 930 5898 +44 (0)121 634 6532 Heather Lawrence Cardiff +44 (0)292 072 6026 +44 (0)161 828 6417 Andrew McCracken Glasgow +44 (0)141 567 6635 Andrew Armstrong Melinda Cross Hannah Eshelby Harriet Costello +44 (0)28 104 2001 +44 (0)117 930 5898 Cardiff +44 (0)292 072 6024 Adam Creighton Matthew Smith Richard Harris Ben Dobson +44 (0)208 283 2522 +44 (0)115 908 2123 +44 (0)113 235 5249 Edinburgh +44 (0)131 243 2217 Tom Lowther James Keeton Tom Asher +44 (0)207 087 5374 +44 (0)115 908 2141 +44 (0)113 261 6244 Glasgow +44 (0)141 567 6628
Looking back Strong demand but take-up constrained in some regions by available supply. At the start of this year we surveyed all of JLL s regional Industrial agency teams to seek their views on the level of occupier demand and take-up (i.e. demand that actually translated into transactions) during 2016 and the level of available supply at the end of the year compared with 12 months earlier. The 2016 vs. 2015 map opposite presents the results. As this shows, our agents told us that demand was higher during 2016 compared with 2015 in eight out of 11 regions, stable in two and lower in only one (the North East). However, in only five regions did they believe that this increase in demand had translated into higher take-up, with take-up flat or down in six regions. The reason for this was the reduction in available supply, which our agents noted in ten out of 11 regions. The only region where our agents reported no change in available supply was the South East, which was due to speculative developments that came on stream during the year. In general, the speculative development that started last year attracted strong interest. At January 2016 we held records on 77 industrial schemes (involving all unit sizes) that were speculatively under construction around the country, totalling some 11.5. A year on, 46% of this floorspace had been taken up. For big box logistics, the share taken-up was 55% with the corresponding take-up share for smaller units at 29%. 2016 saw further industrial rental growth, with every region posting uplifts. Given these demand and supply dynamics, it is unsurprising that 2016 saw further industrial rental growth, with every region posting uplifts. Our data, based on monitoring prime headline rents for standard buildings between 10,000 sq ft and 20,000 sq ft in 59 locations nationally, showed average growth across the country last year of 6%, with the strongest uplifts in the South East (9%) and (8%). Independent data from the MSCI Annual Index shows growth of 3.8% for the industrial sector overall over 2016, with 4.2% growth for standard industrial properties and 2.7% for distribution warehouses. With yield movement making a very modest contribution to capital growth over the year despite the Brexit vote in the middle the overall total return delivered by the UK industrial market was a very respectable 7.7% according to MSCI, which was way in excess of the office or retail sectors. Agent sentiment survey 2016 vs. 2015 Industrial floorspace that was speculatively under construction at the start of 2016 and availability status at the start of 2017. 3 2.5 2 1.5 1 0.5 0 Greater South East South West Wales East Midlands West Midlands North West Yorkshire & Humberside Let Available North East Scotland Demand Take-up Supply Significantly higher Higher Stable Lower Significantly lower
Agent sentiment survey Next six months Our expectations 67 schemes under construction 7.4 3.3 4.1 big box logistics units of 100,000 sq ft and over in units below 100,000 sq ft Available supply will continue to fall. Looking forward six months, our agents remain generally upbeat about the demand outlook with five out of 11 regions expecting demand to be higher over the first half of this year than was the case in the second half of last year, with the remaining six regions reporting a stable demand outlook. The Next six months map opposite presents the results. However, take-up is expected to be stable in nine out the 11 regions and fall in two regions, i.e. the North West and Yorkshire and Humberside, in both cases due to a diminishing supply of good quality buildings. Our agents expect available supply to be lower at mid-2017 than at the end of 2016 in every region bar the South West, where the expectation is for no significant change. At January 2017, we recorded a total of 67 schemes speculatively under construction across the country totalling 7.4, of which 3.3 was in big box logistics units of 100,000 sq ft and over with 4.1 in smaller units. Given expectations of a decline in available industrial space across all regions, we believe that there is still further potential for rental growth. Our latest model-based forecasts of the MSCI time series show growth of 2.9% this year for the sector overall, led by standard industrial property in at 4.9%. According to our model, aggregate industrial yields will drift up over 2017, although we think prime yields could potentially compress further due to very strong investor demand and competition for stock. Our model forecasts that the sector overall will deliver a lower total return this year compared with 2016 at around 7% but once again comfortably outperform offices and retail. Therefore, we expect industrial market conditions to continue to favour developers and investors this year with available supply in ready-to-occupy buildings remaining tight. As a result, corporate occupiers requiring space this year will still find limited immediate market choice. Whatever your objectives, we hope this Tracker helps you stay on course. Demand Take-up Supply Significantly higher Higher Stable Lower Significantly lower
Contacts Agency Occupier Advisory Lease Advisory Andy Harding Lead Andrew Lynn Director Michael Alderton Michael Hancock +44 (0)207 087 5310 andy.harding@eu.jll.com +44 (0)161 828 6415 andrew.lynn@eu.jll.com +44 (0)207 087 5430 michael.alderton@eu.jll.com +44 (0)207 399 5765 michael.hancock@eu.jll.com Tim Clement +44 (0)207 087 5303 tim.clement@eu.jll.com Melinda Cross Director +44 (0)208 283 2591 melinda.cross@eu.jll.com James Miller Associate +44 (0)207 087 5764 james.miller@eu.jll.com Chris Knight +44 (0)207 399 5402 chris.knight@eu.jll.com Rich Harris Director +44 (0)113 235 5249 rich.harris@eu.jll.com Tom Asher Associate Director +44 (0)113 261 6244 tom.asher@eu.jll.com Andy McCracken Director Glasgow +44 (0)141 567 6635 andy.mccracken@eu.jll.com Ben Dobson Surveyor Edinburgh +44 (0)131 243 2217 ben.dobson@eu.jll.com Laura Sutton +44 (0)207 087 5066 laura.sutton@eu.jll.com Investment Sam Fairbairn +44 (0)207 087 5382 sam.fairbairn@eu.jll.com Development Chris North +44 (0)207 087 5299 chris.north@eu.jll.com Research Jon Sleeman +44 (0)207 087 5515 jon.sleeman@eu.jll.com Tessa English Associate +44 (0)207 087 5521 tessa.english@eu.jll.com Raphaele Naud Research Analyst +44 (0)203 147 1135 raphaele.naud@eu.jll.com James Keeton Director Tim Western Director Exeter +44 (0)115 908 2141 james.keeton@eu.jll.com +44 (0)139 242 9305 tim.western@eu.jll.com Carl Durrant Director +44 (0)121 214 9950 carl.durrant@eu.jll.com Heather Lawrence Senior Surveyor Cardiff +44 (0)292 072 6026 heather.lawrence@eu.jll.com