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The modern challenges of the industrial property marketBy: Cathie Sellars

There is uncertainty surrounding the UK’s industrial property sector at present after industrial and logistics floor space take-up fell by almost a quarter (22 per cent) in 2012; down to a level lower than in the 2009 recession.

Only two areas in the UK recorded an increase in take-up last year compared with 2011; the North East improved by an impressive 11 per cent, while the South West also experienced a small, two per cent take-up increase.

In Wales, there was a decline in industrial space take-up by a worrying 46 per cent; particularly concerning since light industry has long been the backbone of Welsh economy.

So what does the future hold for the nation’s industrial units and how will they retain the bulk of investor demand?

Drivers of the UK’s industrial market vary considerably, with demand for smaller industrial units more dependent on the state of the national economy; reflecting the diverse range of activities undertaken by businesses at this spectrum of the market. However, it can also be influenced by the ease of access to finance from banks.

At the other end of the scale, demand for high-volume 100,000+ sq ft industrial units is increasingly driven by retailers - whether it’s internet, multi-channel or high street brands – and third-party logistics firms.

The biggest problem for the UK industrial property market going forward is that a large proportion of available floor space is made up of poor-quality units that many occupiers would consider obsolete. A lack of available modern supply and moderate levels of development has resulted in occupiers struggling for choice to upgrade and expand.

As of December 2012, only 16 per cent of available industrial units – from 1,000 to 99,999 sq ft – comprised of new or refurbished stock, according to Jones Lang LaSalle.

As of Q1 2013, there was just 744,000 sq ft of industrial floor space under construction on a national scale. This shortage of Grade A supply is likely to see developers consider additional small-scale development in markets where there is sufficient demand from companies.

Overall industrial take-up fell across the UK last year, but the capital experienced high demand for Grade A stock, with encouraging levels of enquiries and viewings.

However, in certain markets floor space availability does remain low. Speculative development has been steady across London, particularly to the west of the city, however more development has been mooted in East London (Canning Town) and North London (Enfield).

Investor demand is expected to lie mostly on prime stock within London and the South East. These areas continue to outperform the rest of the UK. The Western Corridor remains buoyant along with good levels of demand around the north of the M25 London orbital. Property in and around Heathrow has also proven particularly popular with logistical access firmly in mind.

In summary, the UK property market has become significantly polarised across the geographic area, with London and the South East faring much better than the rest of the country in terms of prime and secondary assets.

With demand outstripping supply at present, there is an increasing opportunity for landlords to keep headline rents particularly high and drive a hard bargain on incentives.

Additionally, a mixed outlook for the manufacturing sector means that demand from manufacturing no longer accounts for the majority of take-up of industrial property. However, the continued poor performance of the sector – due to loss of jobs and weak industrial production – will still be of concern to industrial landlords.

With no great improvement expected in industrial rents, the challenges facing the industrial sector are very similar to that of the retail industry.

Investors should therefore make carefully considered decisions based on the individual characteristics of any property, as opposed to second-guessing any sector or macro trends. Finding new industrial assets that provide the right balance between income and portfolio enhancement will be key.

About the author

Cathie Sellars, Workspace

Cathie Sellars is the head of marketing at Workspace Group.

Features July 2013

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