Since 2012 the average volume of capital deployed into the UK logistics sector has increased from £1.2 billion to £3.1 billion per year.

In the same period, occupier demand has surged, with 2016 being the strongest year of take-up ever recorded with 36.2 million sq ft (3.36 million sq m) occupied and the volume of warehousing for lease falling to a new low with just 26.3 million sq ft (2.44 million sq m) available. Concurrently, many developers who would have previously traded completed units are now choosing to hold assets in their own funds. Combined, these factors are making it increasingly tough to source opportunities in the sector.

This is borne out in the statistics recorded by Savills on the investment market. In 2017 so far, we have seen £1.8 billion transacted, an increase of 80 per cent compared with the same period in 2016. However, this is driven by a number of large portfolio deals and the more telling statistic is that the volume of logistics investment transactions has fallen 44 per cent in the year to date.

This heavily constrained supply coupled with strong investor demand is keeping yields low (and trending lower). Investors therefore need to think innovatively to answer the question: where can we find value in the UK logistics and industrial sector?

The first solution is to consider taking more selective risk. Given the lack of stock for occupiers in markets, many tenants will start to consider older units as long as the location suits their operation. Markets such as the North West, where there is a large supply of grade C units, could stand to benefit if units are refurbished and repurposed for the grade A/B market.

Investors will also do well to look at counter cyclical opportunities. With many institutional investors only considering prime assets, for liquidity purposes, it would make sense to identify opportunities in geographies which many investors do not consider prime but where occupier fundamentals remain strong.

Lastly, with 60 per cent of transactions since 2015 being for lot sizes below £10 million, it would make sense to examine the smaller end of the market to build scale in a less crowded investor environment.

Further information

Contact Savills Industrial & Logistics