After a tumultuous few years, there is a sense that an element of stability has returned to the UK logistics market which resulted in a strong end to 2024 in terms of investment volumes. Indeed, a strong fourth quarter saw £2.07bn of logistics assets transacted, meaning that year-end volumes reached £3.47bn, reflecting a 12% rise on 2023 and a 73% rise on the long-term pre-Covid average. At £2.07bn, H2 2024 was in fact the strongest half for investment volumes since H1 2022. The second half of the year also saw the encouraging return of larger lot size transactions in the big box market.

As we highlighted in our recent publication of Big Shed Prospects, industrial and logistics remains a conviction play for many investors going forward and there is a weight of capital – encouragingly from a number of new entrants – targeting the sector, which should mean that investment volumes, at the very least, remain stable as 2025 progresses, as investors currently seem willing to look past some temporary weakness in occupational markets. There are, however, a myriad of factors that could rear their heads and impact liquidity in the market.

Global bond markets have started the year in an unpredictable mood. Much of the current optimism in real estate capital market is predicated on a continued decline in interest rates. And yet benchmark borrowing costs have risen by around 50–100 bps across major advanced economies since the lows of September. In the UK, the 10-year government bond yield hit a 16-year high in early January.

The ongoing sell-off in bond markets is primarily driven by higher US Treasury yields, given their role in anchoring global rates. This is underpinned by expectations of an inflationary bias in the policy objectives of the incoming US administration, as well as continued resilience in the economy, and increased hawkishness from the US Fed. When the US pivot was initiated with an outsized 50 bps rate cut back in September, markets expected the policy rate to fall to around 3% by the end of 2025. Now, that expectation is closer to 4%, and there is a non-negligible probability that the Fed will not cut at all this year, which will feed into the thinking of rate-setters closer to home.

Moving into 2025 we expect investors to be laser-focused on the rental growth prospects for the market. As our research highlights, supply has risen to a level not seen since the aftermath of the global financial crisis and take-up is reverting to historical norms; as a result, units are remaining vacant for longer. The latest output from the Savills rental projection model suggests an average of 4.1% rental growth per annum to 2028, with significant regional variation depending on the prevailing levels of supply and demand. This is a downward movement from our projections last year. Whilst rental growth of 4.1% remains a strong number, we should not expect dramatic outperformance unless vacancy rates start moving inwards and greater tension returns to the market. Markets such as the East of England and the West Midlands have greater prospects for outperformance given their vacancy rates are already starting to head inwards.

Savills prime yields currently sit at 5% for both multi-lets and logistics, but with downward pressure applied for the multi-let sector. The weight of capital targeting the sector has the potential to move yields inwards, particularly in the multi-let space as the year progresses.

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