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UK Industrial Property report shows recovery has started

wantspacegotspace.co.uk - UK Industrial Property report shows recovery has startedDunlop Heywood recently undertook a detailed research report into the UK Industrial sector as it plans its strategic support for clients into 2014. Here are some of the highlights on the back of new economic output figures, supported by forecasts from the Office of Budget Responsibility.

Generally we are seeing a more positive economic outlook across the industrial sector and demand is expected to increase with improving economic activity. The supply of industrial stock is also reducing with large elements of stock now obsolete, creating limited availability across the UK.

There are still regional variations on rent and availability but with virtually no new development taking place in past 5 years this has added to the dearth of availability on good industrial stock.

As a result, we forecast that there will be some rental growth and there is also evidence of rental incentives reducing and lease lengths increasing. For some businesses, design and build may be only option resulting in delay and upward pressure on rents reflecting cost to build.

The Office for Budget Responsibility’s (OBR) latest forecast, published with the Budget, predicts GDP growth this year of 0.6%, with growth improving in 2014 (1.8%). Expect this gradual pick-up in economic activity to be reflected in a slow improvement in demand by companies. DH believes that developers will consider further small scale speculative development this year in markets where there is a shortage of Grade A supply and good interest from companies.

The industrial market overall is forecast to experience a steady rental growth average of 1.2% per annum over the next 5 years. The growth is expected to be driven by the tight supply of good quality space and the release of pent up demand, causing the balance of power to swing back to the landlord. There is evidence of this starting to happen in particular regions where incentives are reducing.

Nationally, available supply continued to fall last year and at the end of 2012 total industrial and logistics availability was 1.6% lower compared with three months earlier and 2.3% lower than September 2011. There is still a shortage of Grade A supply, with a sizeable share of available space considered obsolete.

As at February 2013 there was 744,000 sq ft of industrial floor space speculatively under construction nationally. This is higher than recorded at November 2012 (558,000 sq ft) but down considerably on the peak recorded in mid-2007 (15.5m sq ft).

At the end of December 2012, the total available supply of industrial and logistics floor space stood at 327.4m sq ft, down 1.6% on September 2012. Availability in units from 1,000 to 99,999 sq ft (240.6m sq ft) fell by 2.6% on September 2012. At the end of December, 16% of available space in units from 1,000 to 99,999 sq ft was in new or refurbished units.

Headline prime rental values remained largely unchanged over the course of 2012 but rents increased slightly in certain markets where there was a shortage of prime stock.

Occupier demand nationally had total industrial and logistics floor space take-up down by 22% in 2012 compared with 2011, due to weak economic conditions and a shortage of good quality available stock but we expect demand to increase this year, as the economy gradually picks up. Take-up in units from 1,000 to 99,999 sq ft totalled 54.4 million sq ft, 24% lower than 2011.

Total industrial and logistics take-up in units from 1,000 sq ft upwards totalled 75.3 m sq ft in 2012, 22% down on 2011 (96.3m sq ft). The % fall in take-up in 2012 was greatest for small and
medium-sized units between 1,000 sq ft to 99,999 sq ft, where take-up fell by 24%. Only two regions in UK registered an increase in take-up in 2012 compared with 2011: the North East posted an 11% increase whilst take-up in the South West rose by 2%. All other regions registered a decline in take-up, with Wales registering the largest decline, at 46%.

Against this backdrop there are signs that the market is picking up. There is a general consensus that there is a good level of unsatisfied demand and with the economy forecast to grow this year more than last, albeit still very modestly, we would expect this to be reflected in increased industrial market activity.

At the end of December 2012, the total supply of immediately available industrial and logistics floor space across UK stood at 327.4m sq ft, of which close to three-quarters (73%) was in units below 100,000 sq ft. Total availability at the end of December 2012 was 1.6% lower than at the end of September 2012.

At the end of December 2012, availability involving units from 1,000 to 99,999 sq ft was 2.6% lower than at the end of September 2012. Compared with recent levels of take-up (four-year annual average 2009 - 2012) total availability at the end of December 2012 equated to just under three and a half years of demand. Availability in units from 1,000 to 99,999 sq ft also represented around three and a half years of demand.

Regionally, the largest fall in availability in Q4 2012 was in the West Midlands, where total availability fell by 7.1%. By contrast, the largest increase in availability was recorded in East Anglia, where availability rose by 4.9%. Seven of the 11 regions recorded a decrease in total availability in the three months to December 2012.

A large proportion of the available floor space nationally consists of poorer quality units which many occupiers would consider obsolete. The lack of modern available supply and the low levels of speculative development since the onset of the recession have resulted in occupiers having less choice and have had a knock-on effect on demand.

When looking at rents, UK industrial rents may be responding to improved demand. London and the West Midlands posted monthly gains of 0.28% and 0.19% respectively in July, with the IPD Monthly Index showing a second consecutive, albeit modest, increase of 0.07% UK-wide.

The overall increase in prime rents across 59 locations in the UK slowed to 0.6% in 2012, compared to 1.3% in the previous year, despite the continued tightening in supply levels of grade A stock.

Six of 11 regional markets are now averaging growth, with a further three regions indicating that rents have remained stable.

The two regions to record a decline in prime rental values over 2012 were East Anglia and Wales, where rents fell by 1.3% and 9.3% respectively. Overall, the number of locations across the UK registering either growth or static prime rental values rose to 88%, up from 73% in the previous year.

Posted by The Editor (wantspacegotspace) on 7th October 2013

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