Investment demand for industrial properties remained buoyant in second quarter 2018, continuing to exert downward pressure on prime yields, particularly for those assets located in London and the South East, according to BNP Paribas Real Estate. According to the MSCI Monthly Index June 2018, net initial yields (NIY) for London and South East standard industrial moved in to 3.4 percent and 4.3 percent, respectively.
Total investment reached £1.74 billion ($2.2 billion) in second quarter 2018, taking the total for the first half of 2018 to £3.8 billion, ($4.8 billion), relatively in line with the corresponding period last year.
U.K. institutions have been particularly prevalent in the market with their total share of investment reaching 36.7 percent, the highest share since fourth quarter 2015. Similarly, REITs and property companies also had a strong showing, accounting for a combined 26.8 percent. A key example of this was London Metric PLC’s purchase of the Platinum Portfolio for £55 million ($70 million) at a blended NIY of 4.4 percent and a reversionary yield of 5.3 percent.
“Reversion and rental growth prospects, factored in by investors for industrial properties, continued to be a key determinant of pricing over the first half of the year, especially for industrial estates located in London and the South East,” said James Fairweather, head of industrial investment at BNP Paribas Real Estate. “A lack of supply, strong demand from occupiers in these areas and restricted land availability to build on continued to sustain activity.”
Looking to industrial leasing, activity for large distribution warehouses (100,000 square feet and above) amounted to 6.9 million square feet in second quarter 2018, up 27 percent on the subdued numbers witnessed in second quarter 2017. These figures take the total take-up for first half 2018 to 16.2 million square feet, 8.8 percent ahead of the corresponding period last year.
This increase was driven primarily by occupiers looking for increased automation to bolster online and in-store fulfilment capacity. As a result, high-quality distribution warehouses were extremely sought after in first half 2018, with design and build (D&B) units reaching a record-breaking 64.2 percent share of total.
Among some of the largest deals, Amazon agreed a 20-year pre-let of 1.5 million square feet at Link 66, Darlington, while online fashion retailer PrettyLittleThing signed a lease for 614,264 square feet of refurbished space at Sheffield 615, the largest available existing warehouse nationally.
Encouragingly, total national supply, including speculatively developed units, stood at 3.2 percent down on second quarter 2017. This is in spite of first half 2018 witnessing the delivery of more than 2.7 million square feet of new space, with a further 7.5 million square feet under construction as of the end of June 2018.
Ben Wiley, head of industrial agency at BNP Paribas Real Estate, commented, “There has been strong occupier demand for large distribution warehouses, which is a trend we anticipate will continue, if not even grow. As retailers look to evolve in order to keep pace with changing consumer behavior, large fulfilment centers will be crucial to streamline their supply chain so they can bridge the gap between traditional and online shopping experiences.”
