Take up falls in logistics property
12 December 2012
Dwindling levels of available prime stock have seen take up in the logistics sector fall to its lowest levels since 2009, as occupiers shun older units and switch to 'build to spec' alternatives to meet their requirements, according to new research by BNP Paribas Real Estate and IPD.
While there has been some transfer of demand to older units, bespoke demand from occupiers, which are reliant on modern, technically advanced units able to supply their distribution needs, means take up fell to just 6.67m sq ft in the third quarter, a 35% fall from the same time last year.
The BNP Paribas Real Estate Logistics Index, compiled in conjunction with IPD, covers a sample of 545 logistics properties across the UK, totalling £5.7m. This amounts to 28.5% of the total IPD Industrial Segment, worth £20.2bn as of the end of 2012.
Despite this, the UK logistics sector has been one of the stronger regional asset types in the UK. Total returns for the year to June 2012 for both logistics and industrials was 5.7%, outperforming the IPD all property average, at 4.4%.
However, analysing the data at a regional level shows that logistics have outperformed industrials in seven out of ten regional markets. Only Yorkshire, the North East and Wales saw industrials outperform logistics. The best performing regions for total return for the logistics sector were London & South East and Eastern with 8.0% y/y and 9.9% y/y, respectively.
Though logistics units have not been immune to the negative sentiment affecting capital values that have dogged the UK property market, strong income returns have boosted performance. Both logistics and all other industrial sub-categories saw values fall by -1.5% h/h, while income returns were 3.5% for both.
Yields were in excess of seven percent for eight of the ten regions measured, and this has not failed to attract the attention of investors, but the difficulty remains in securing stable tenants - and while prime, well located stock with a secure local market is in demand, older stock is suffering.
Overall rental value growth was negative at -0.1% h/h in H1 2012 for both sub-categories, even if there were marked differences among regions. Over the last twelve months, rental values have been relatively stable, declining by less than -0.2% at the headline level, and in the core areas, such as the East, East Midlands and London & South East rents have grown in the last six months, albeit at very muted levels.
However, the latest occupational figures showed that in Q3 2012, only 0.97m sq ft of industrial space over 250,000 sq ft was secured compared to 4.42m sq ft in Q2 2012, largely due to a lack of available facilities of this size.
With regards to regional take up of space, the Midlands accounted for the majority of the transactions in the third quarter 2012, with take up totalling 4.4m sq ft, which meant it is the only region to record an increase in take up. Elsewhere, take up in London and the South East fell by 51% in Q3 2012 compared with Q3 2011, totalling only 1.28m sq ft, whilst take in the South West also fell, dropping by 41%.
Furthermore, following on from two years of negative figures, net investment as a percentage of total capital value was in positive territory in 2010 and 2011 for both logistics and all other industrials, with 3.5% and 0.6% respectively.
Kevin Mofid, associate research director at BNP Paribas Real Estate, said: â€œAt a nationwide level, total returns for logistics and industrial converged at 2%, whilst at a regional level the differences were stark, with logistics outperforming industrial. These returns are being driven, in the most part, by the solid income return derived from logistics assets which ties in with occupational statistics for 2012, with take up levels decreasing and the availability of modern stock at its lowest level since we started collecting data in 2008.
â€œThe consequences of the worldwide economic turbulence have rippled throughout all major sectors of the economy. However, logistics has proved to be more a resilient asset type than all other industrial, as it has emerged quicker from the recession over the last three years.â€
Greg Mansell, head of research at IPD, said: â€œThe logistics sector has not escaped the negative impact on UK property values, from austerity cuts in the UK to wider economic turbulence from the ongoing Eurozone crisis, but fundamental drivers behind the sector remain promising. In particular, sheds are benefitting from the changing dynamics of the retail sector, which is seeing increased demand from internet and click & collect operations, in which modern logistics stocks plays a key role.
â€œBut while domestic demand, at least for new stock that can be tailored to modern distribution methods, remains promising, international demand may be more of an issue in the future. While the UK may be exporting more globally, recent statistics have shown exports to the Eurozone declining, and if continental demand continues to fall, this may have an impact on logistics centres in the UK.â€
For a copy of The BNP Paribas Real Estate Logistics Index please email: firstname.lastname@example.org.