Big Becoming Less Beautiful
This blog explores what CBRE’s three different industrial rental indices tell us about the changing pattern of supply and tenant demand across the UK industrial market over the last seven years.
CBRE produces a range of indices of performance on the industrial market, each of which – because of the nature of the sample it reflects – shines a light on a different part of the sector.
- The CBRE Logistics Index can be thought of as representing the performance of a portfolio of Logistics assets. It is based on the valuations of built for purpose logistics assets, that are at least 100,000ft2 in size and with a minimum of 10m clear eaves height.
- The CBRE Prime Rent & Yield Monitor can be thought of as representing the performance of the absolute best multi-let industrial assets. It has tracked, since the early 1970s, the best rent achievable on hypothetical prime units in hundreds of locations. As such, growth it records reflects tenant demand for the absolute best real estate appropriate to each location. In the vast majority of locations, this would be multi-let industrial estate type stock, in a few instances larger logistics / warehousing stock.
- The CBRE Monthly Index can be thought of as representing the performance of a portfolio of multi-let industrial assets. It amalgamates the performance of some £25bn of monthly-valued funds, which collectively held over £5.5bn of industrial assets at the end of 2018. This pool is a mix of assets, but as with the Prime Rent & Yield Monitor the vast bulk is multi-let industrial stock.
Figures 1 and 2 show ERV growth for these indices over the last seven years, divided into three periods. Each index has a regional split. The key points are:
- In the first two years of the period (2012-13) ERV growth (and by implication tenant demand) was clearly strongest for Logistics rather than multi-let estates, the former seeing ERV growth of around 3%pa versus modest declines for the latter.
- This was followed by a period of relative similarity in performance in the three years from 2014-16, when the Logistics and Monthly indices delivered broadly similar levels of ERV growth of 3-4%pa.
- Thereafter, in the two years 2017-18, ERV growth on multi-let estates, at around 5.0% per year, was roughly double that on logistics.
- ERV growth on prime has consistently been highest of all – but of course this is for a rarefied and constantly brand-new asset.
- In almost all cases, ERV growth has been relatively stronger in London and South East than Rest UK.
Arguably, this data shows a key shift in tenant demand over the period, away from big box logistics space – although, with ERV growth of 2.5%pa in 2017-18, demand for this stock is still unquestionably strong albeit slowing in Rest of UK – and towards multi-let estates. This is perhaps indicative of greater supply constraints in this stock, compared to the easier to construct logistics market, as well as burgeoning demand for space from SMEs and last mile delivery functions. Investors may find that this area of the market is also where the strongest growth is to be found in the coming years.
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