Economic data in the UK remains volatile and unpredictable, as recently demonstrated by two recent announcements from the ONS. Firstly, revised GDP figures were released, showing that Q4 posted 0.1% growth in Q4 with the original estimate at zero growth. Meanwhile, inflation surprised many, with CPI rising to 10.4% in February, up from 10.1% in January, mainly driven by food shortages experienced at the start of the year, which has driven food price inflation to 18.2%, the highest level since 1978.

This volatility has meant investors are still in “wait and see” mode, with investment volumes reaching £5.6bn in Q1 2023, the lowest quarterly volume since 2009, if we exclude Q2 2020 when the onset of Covid-19 paralysed the market.

However, confidence is beginning to return as pricing levels plateau and, in some cases, move inward, as experienced in industrial and regional offices where yields have moved inwards by 25 bps, meaning the average Savills prime yield now stands at 5.57%.

As the year goes on, there is potential for investment volumes to trend upward as there is plenty of capital ready to deploy when the market does recover, with an estimated US$811bn in dry powder sitting in the accounts of unlisted funds globally. This, combined with pricing movements, has created a pool of willing buyers, but, at this stage, sellers remain in short supply.

Nearshoring starts to benefit UK logistics market

Much has been written over the last three years regarding nearshoring and reshoring for supply chain resilience and its impact on global supply chains. Countless surveys of supply chain professionals all pointed to companies wishing to diversify their supply chains so that companies are more insulated from future shocks but also to mitigate for potential future geopolitical issues.

Up until recently, there was however very little evidence of this phenomenon filtering through into occupational real estate strategies. That changed in 2022 when, in the UK, we saw 11.4m sq ft of new leases signed for manufacturing-related occupiers. This was the highest figure ever recorded, exceeding the long-term average by 73%.

The companies staking space generally fall into three broad categories: food production, automotive and pharmaceutical. For the food and pharmaceutical supply chain, there is a clear need to improve resilience, as demonstrated by recent issues with the availability of certain fruit and vegetables, whereas, in the pharmaceutical supply chain, there is clear political will to ensure security around vaccine and medicine supply.

Whilst car production in the UK remains at depressed levels, when compared to pre-Covid levels, the transition to electric vehicles is meaning companies are reorganising and expanding their supply chains to account for new production processes.

This trend has continued into 2023, with provisional Q1 data showing that manufacturing-related take-up accounts for 31% of demand against a long-term average of 23% of the market.

We expect this trend to continue in the short to medium term as governments look to support strategically important sectors; however, reorganising supply chains is a slow-moving process, and many cost variables are in play, such as the cost of labour, land and energy. Moreover, occupiers in this sector tend to have a preference for owner occupation given the often strategic nature of such sites in a supply chain.

Whilst this trend is therefore a positive demand driver for the logistics sector as a whole, it is not expected to replace falling demand from the online retail segment and will therefore only mitigate for the overall drop in demand we are currently witnessing.

Take-up for science-related real estate across the ‘golden triangle’ of London, Oxford and Cambridge totalled 1.39 million sq ft in 2022, the highest figure in the past five years. Both London and Oxford saw an increase in take-up at 451,148 and 497,911 sq ft, respectively. In contrast, our figures show that Cambridge saw a 35% decline in 2022 to 438,911 sq ft, which can be attributed to a critical lack of stock, with vacancy rates for labs at just 0.57% across the city.

Venture capital (VC) funding also remained positive in 2022, with London alone 67% above the five-year annual average. In total, the golden triangle saw £2.4 billion of VC raised, which we anticipate will translate into further real estate requirements as these businesses continue their expansion. Looking ahead, Savills has recorded over 4 million sq ft of requirements across London, Oxford and Cambridge, suggesting there is still a significant level of demand for laboratory space.

More can be read on this topic in our latest report on the life science sector.