Investors advised to back speculative development
Such is the demand for logistics warehouse investments that yields sub 4% are commonplace and investors are finding that they cannot source product to buy.
According to Savills latest Big Shed Briefing, investment volumes for distribution warehouses reached £4.7 billion in 2020, a 25% increase on 2019 figures and £500m higher than the previous watermark of £4.2 billion set in 2014. This is despite the fact capital markets all but ceased at the height of the initial Covid-19 lockdown.
In relation to the pandemic, Savills notes that 76% of all capital was deployed in the second half of the year once trading could resume in a Covid-secure manner.
Savills has also seen a change in purchaser profile, with overseas investors accounting for 52% of transactions, equalling 2017 as the joint highest proportion ever recorded.
Tom Scott, director in the industrial investment team at Savills, said: “The supply and demand dynamics of the occupier market will continue to drive competition for the best assets, which in turn will generate strong investment volumes in to 2021. We will also continue to see downward pressure on yields, which with the sheer weight of capital and sentiment surrounding the market now stand at 3.75% for both distribution warehouses and multi-let estates.”
Kevin Mofid, head of industrial research at Savills, adds: “The lack of Grade A stock in the occupational market, coupled with the lack of opportunities for investors to purchase prime assets could spell a change of thinking in 2021. We believe that investors should start to consider edging further up the risk curve, forward funding spec as a way to access the market at a discount. However, it is imperative that what is built provides the right size building in the right location with no design compromises, which will perhaps mean a rethink of old institutional standards.”
Savills is currently tracking 8.19 million sq ft of speculative development due to PC in 2021, which given recent take-up levels will largely maintain supply and vacancy at their current levels. The firm suggests that as investors face growing competition to acquire existing income producing assets, a larger number may start to consider forward funding speculative development as a means to gain entry to the market.
Recent deals have seen developer Panattoni sell its 117,000 sq ft speculatively built warehouse to Aberdeen Standard Investments in a £23.3 million deal to the investment firm, reflecting a net initial yield of 4.3%.
The property is let to modular homes builder Swan Housing, on a 15-year lease. JLL advised Panattoni and Burbage Realty acted for Aberdeen Standard Investments.
In another deal reported by Logistics Manager Cabot Properties secured Unit C, Logistics City, Basingstoke for £4.4m from Kier Property. The urban warehouse is let to DFS Trading as a fulfilment centre for its Sofology brand. Quoting rent on the property was £11 per sq ft. Hollis Hockley and Lamberts Smith Hampton were joint letting agents. Colliers International advised Cabot Properties and LSH acted for Kier Property.
Charles Wood of LSH said: “There has been a significant increase in prime rents in the region from around £9 per sq ft two years ago to the £11 per sq ft that we are seeing now.”
It is this kind of rental increase that is so attractive to investors and is fuelling such strong demand.
Indeed, Globally, there is set to be a 50 per cent surge in investment into commercial real estate in the second half of the year, according to Colliers International in its new Global Capital Markets 2021 Investor Outlook paper. In EMEA, the momentum continues in the industrial and logistics and living sectors, which are less dependent on economic growth.
“Based on our global analysis, which gives us a bird’s-eye view of investors interests and expected appetite, longer-term tailwinds in the property sector remain intact. With a massive volume of equity raised globally and the need for real assets, investors are eager to deploy pent-up capital and pursue opportunities during the year” said Tony Horrell, Global Head of Capital Markets at Colliers International.