Since Brexit there have been conflicting reports regarding the current market for UK warehousing space. Consumer confidence was expected to decline and have an immediate impact on businesses, but what has been happening?
GfK reports of a sharp fall in consumer confidence in July 2016 have worried many businesses but corresponding figures for consumer spending, arguably a more relevant and tangible measure, show an increase in spending from month to month and only a slight drop on last year to date. Conflicting data such as this makes it difficult to forecast the impact on the UK warehousing market so what is the reality?
In July, Savills reported an 89-month low in the Total Commercial Development Activity Index, with declines in both the public and private sector. A closer look at the report reveals that many sectors were already in decline pre-Brexit including Leisure, Office and New-Build activity. UK Industrial Warehousing statistics showed a decline for the first time in 4 years although the rate of increase had slowed during the previous months. In an unexpected positive sign for the logistics industry, given the shortage of warehouse space that was previously reported, the data also indicates that an increase in Industrial/Warehouse activity is expected outside London and the South East in the coming months.
In the first quarter of 2016, before Brexit, Savills reported the total take up of warehouse space (also possibly a more reflective measure of Logistics activity) exceeded 6.99 million ft2, 24% higher than the long term average. Their July report confirmed that the trend continued with a rise to 29% in the second quarter.
As expected, the level of occupancy by online retailers and parcel delivery companies is increasing as a percentage of the total (currently at 25%). Figures may be skewed slightly by five deals of over 500,000 ft2 that have already been concluded but who is to say this will not continue. It may be that existing or speculative builds of units of this size slow down but occupiers can always turn to the build-to-suit (BTS) market for bespoke requirements.
48% of the total space transacted so far in 2016 is BTS, suggesting that the supply of good quality large units cannot be met from existing stock. Historically, large-footprint units were developed as manufacturing plants with lower roofs than newer warehousing and storage facilities. Technology has moved on; standard storage and operating heights are now greater and environmental standards and expectations exclude many of the older, lower but larger units.
At the same time Savills reports that logistics units continue to attract new investment, Barclays’ Logistics Confidence Index continues to show declining confidence from senior Managers in the industry. This dip in confidence may have more to do with increased pressure on margins and continued driver shortages than a reduction in volumes. In reality, the drop in volumes predicted after Brexit has not been as severe as expected. The second quarter of 2016 saw £526m of transactions, giving a year-to-date figure of £1.2bn, easily in excess of the long term average of £850m.
Currently it seems that foreign investors have more confidence in the UK logistics market than local investors or UK-based logisticians. The forecast for the UK Warehousing Market remains choppy but history is not always a good barometer for the future. Our view in brief is that:
Whilst general confidence remains low:
- The supply of speculative units will continue to fall.
- The development of build-to-suit units will continue to grow as a proportion of the total supply as this offers a low risk opportunity for investors.
- There are a number of unfulfilled requirements for mega units that will keep take up high but may continue to skew the view of the overall market.
- The availability of existing medium to large sized units will remain limited.
- Yields for new builds and therefore rents will rise as demand continues to outstrip supply.
- Going forward, the Midlands and North West are likely to remain ‘hot spots’ as costs and availability restrict growth in London and the South East.
UK Retail Sales
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Savills Big Shed Market