UK Logistics Market Sees a Return to Better Health
London, 1 February 2010 – The UK logistics market demonstrated a good degree of resilience in 2009 despite the economic downturn. With prime yields showing signs of a sustained recovery, there was a widespread improvement in investor sentiment, according to CB Richard Ellis’ recent 2009 UK Logistics MarketView.
In 2009, £1.4 billion was invested in distribution warehouses in the UK, compared to a slightly lower level of £1.3 billion in 2008. There was rapid compression of prime yields in the latter half of 2009, driven by the strong reemergence of demand from UK institutions in the sector. Investment activity was largely focused in the South of the UK, with both the South East and Greater London regions each taking a 26% share of total transaction volumes.
John Adcock, Head of Industrial Investment, CBRE UK, commented: “In the second half of 2009 there was a widespread improvement in Investor sentiment, led by the Retail Unit Trust Funds who enjoyed a dramatic reversal of fortunes from redemption pressure to large cash inflows. As we enter 2010, we continue to see a significant level of competition for the best stock, causing prime yields to trend downwards. We expect the gap between prime and secondary yields to narrow this year, from the historically high level of 450 basis points at present, as investors seek higher returns and Landlords capitalise on strong levels of demand.”
Paul Farrow, Head of Industrial Agency, CBRE UK, commented: “Despite the drop in top-tier lettings last year, 2009 ended with a steady improvement in market sentiment and activity. We expect occupiers to remain cautious in response to the ongoing problems in the UK economy, but the industrial and logistics market is undeniably in better health going forward than at the end of 2008.”
Despite prime rents being under significant downward pressure, a few UK regional markets registered upward fluctuations in rental values in 2009, with the dominance of secondhand space and supply of new premises falling dramatically. With very limited speculative development activity planned in the next 12 months, it is likely that some regions will have very low levels of new space by the end of the year.
“Until we see a sustained improvement in the availability of debt finance, and a rebalancing of supply and demand, speculative development will not be viable,” added Farrow.
The occupier market had a relatively positive performance in 2009, although supply over the past 12 months has increased significantly as a result of second-hand space being released to the market, fuelled by the collapse of key occupiers such as Woolworths. At the end of December availability of buildings of 100,000 sq ft plus was 55.4 million sq ft compared to 34.9 million sq ft in 2008 in total.
Occupiers were able to take advantage of favourable terms offered by landlords in 2009. Following the introduction of empty rates legislation, there were a number of rate-saving deals where premises were offered rent-free to avoid incurring charges. Occupiers undertaking lease re-gears were, in some instances, able to secure rent reductions of up to 15% during 2009, but by the end of the year these were becoming increasingly uncommon.
The total take-up of logistics space of 100,000 sq ft plus was 12.5 million sq ft in 2009, only 15% lower than the 14.3 million sq. ft. let in 2008; although there was a significant reduction in top-tier lettings, and lettings for space in excess of 500,000 sq ft dropped from 22% in 2008 to just 4% in 2009, indicating that occupiers are choosing to wait until the overall outlook becomes clearer before engaging in significant transactions.
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View the UK Logistics H2 2009 MarketView here