Bumper year for Midlands industrial property set to continue in 2021

The Midlands logistics and industrial property market in 2020 included close to record take up levels, rising rents and an upsurge in investor demand, which is set to continue into 2021, according to new research from Knight Frank.

The latest Midlands Industrial Insight report from the global property consultancy shows that the existing shift to online shopping accelerated dramatically as a result of Covid, triggering record levels of take up in 2020 for industrial buildings over 50,000 sq ft, particularly among third party logistics and end user distribution companies, which accounted for 70 per cent of all transactions, and direct e-commerce which accounted for 19 per cent.

James Clements, head of Knight Frank’s Logistics & Industrial team in the Midlands, said: “The reports shows that occupier demand and investor sentiment were at an all-time high in 2020, and with a continued squeeze on supply in 2021 there is likely to be further growth in the region.

“The rise of ecommerce is only going to accelerate as consumer behaviour continues to shift in favour of online purchasing as many have grown accustomed to over the past year. Whilst we do not expect 2021 to record a similar amount of take up as the past 12 months, we do predict further rental growth across the market with the gap between modern existing and new stock closing further.

“Speculative development should continue, and those that paused due to the pandemic will revisit appraisals factoring in the significant yield compression experienced over the last 12 months.

“The past year has solidified the Midlands logistics and industrial market as a major target for occupiers and investors alike, a relationship promising great things for both for years to come.”

In 2020 the industrial property investment sector in the Midlands saw a rollercoaster ride of positivity during the post-Election and post-Brexit early months, then a pause as the pandemic hit hard in March, followed by a relentless charge in later months as it became clear that industrial property was in demand as the world went online.

For the remainder of 2020, logistics and industrial outperformed all other commercial property sectors, with offices and retail in particular facing the prospect of low total returns as stifled, and even negative, rental growth forecasts took effect.

As a consequence, a wave of capital actively targeted the industrial sector. Sector specific funds were raised by major players such as Blackstone, Exeter, Copley Point, London Metric and these are competing against the traditional UK and overseas funds.

Ashley Hudson, head of Knight Frank’s Capital Markets division in the Midlands, commented: “Real estate has a compelling appeal for investors. However, it must be noted that the weight of capital targeting those assets is forcing pressure on yields and we forecast this to continue in to 2021. At the start of 2020, prime logistics yields stood at 4.75% to 5.00% and multi let at 5.25%.

“The spectacular shift for the sector is ably illustrated by the yield improvement over the course of the year. As at the end of 2020, prime logistics has improved 100 bps to 3.75% to 4.00% and multilets by 75 bps to 4.50%. As with a whole host of other events in 2020, this is unprecedented and yields are at their keenest since records began

“The overriding sentiment to logistics and e-commerce assets is positive, and it is a commonly held view amongst investors that the sector will largely remain resilient. At least for the short to medium term the future looks bright for shed investment.”

Occupier take up for 2020 was 25 per cent above the five-year average at 17.01m sq ft, a level not seen since 2014. The East Midlands accounted for 67 per cent of the lettings, totalling 11.3m sq ft, of which some 40 per cent was on a build-to-suit basis.

Headline deals in the year included the 840,000 sq ft DIRFT developed by Prologis in Daventry for the Royal Mail, SEGRO’s 670,000 sq ft East Midlands Gateway development for DHL at Kegworth, and the 550,000 sq ft Panattoni Park in Nottingham developed by Panattoni and occupied by Amazon.

The Knight Frank report details the most active occupiers in the region: Amazon with approximately 1.2m sq ft across four Midlands buildings including major acquisitions in Hinckley, Nottingham and Birmingham; Royal Mail with the largest pre-let transaction of the year, committing to 840,000 sq ft at Prologis’s DIRFT; Clipper Logistics driven by contracts to acquire over 2m sq ft of space, and DHL agreeing terms on two pre-let warehouses of 694,608 sq ft and 192,000 sq ft at SEGRO’s East Midlands Gateway.

Rental levels in the Midlands grew over the year, with headline rents achieving £6.95 per sq ft above 100,000 sq ft. The gap in rents between new and good-quality second hand space closed, with occupiers valuing existing fit out.

On the supply front, data from the Knight Frank report indicates there is a critical shortage of space immediately available above 50,000 sq ft in the Midlands, roughly equating to 8 months supply, and increasing to 10 months when including buildings under construction.

James Clements commented: “The case for speculative development across the region is strong. This is particularly noticeable above 100,000 sq ft across the Midlands as a whole, and extremely apparent above 250,000 sq ft in the East Midlands.”