Prime yields in the UK have reached their lowest levels since 2007, according to our latest Market in Minutes research. In February, the all sector average prime yield reached 4.50 per cent, just 19 basis points (bps) from the previous peak of 4.31 per cent in March 2007. Logistics and industrial yields in particular have experienced considerable hardening following a record year.

Logistics yields now stand at 4.25 per cent,  the lowest level ever recorded. This follows a stellar year in 2017 for investment into UK industrial property. Volumes reached the highest ever recorded at £11 billion, which accounted for 17 per cent of all investment into UK commercial real estate – the highest proportion of the market on record. This has led many commentators to ask: where can it go next?

The multi-let industrial sector also had an excellent year and further downward pressure on yields is anticipated as investors becoming increasingly interested in urban logistics and last-mile delivery. Recognising that retailers, parcel delivery companies and food distribution businesses need to be located in close proximity to population centres, has meant there are strong prospects for rental growth in many of the markets Savills monitors.

Complicating matters further, however, is the fact that the supply of warehousing in the UK is at record low levels and, coupled with strong levels of occupier demand, development of space has remained muted.

Vacancy rates have remained steady for the last four years at around 6.5 per cent, falling to around 3 per cent in London. There are currently fewer than 200 sites in the country capable of delivering large-scale units and these are in the hands of a small number of developers. This impacts on the near future of supply levels as any new stock will be carefully controlled and, while we expect to see increased speculative development in 2018 of up to 5 million sq ft, take-up levels remain strong. Q1 2018 take-up is predicted to have reached 13 million sq ft; the best quarter ever recorded, meaning that vacancy rates should remain at their current low levels.

However, the UK remains a relatively under-supplied country in terms of warehouses, with just 7.61 sq ft of warehousing space per head, compared with the US level of 39 sq ft per head. With one pound in five currently spent online, and this forecast to grow, we expect there to be even greater demands to deliver much needed stock to the market.

In the medium term these conditions are expected to drive further rental growth as occupiers compete to secure the best sites for their operations. 

Further information

Read more: Market in Minutes: UK Commercial