UK Industrial Investors Forced Up the Risk Curve

Increasing investor interest in higher yielding industrial property in the UK has led to the emergence of a new ‘good secondary’ sector, applying to both single and multi-let assets. The shift reflects an increasing number of Institutional grade properties which are now being transacted, due to a combination of the historically high prime/secondary yield gap and the fact that investors are being priced out of the prime end of the market.

Roderick Mackay, Associate Director of UK Industrial Investment, CBRE, said: “An increase in the number of higher yielding investments transacted in the market has led to the emergence of a ‘good secondary’ sub-sector for both single and multi-let industrial assets. While the ‘good secondary’ yield currently stands at 9.00%, we expect this to move in during the year as investors continue searching for higher returns and the occupational market improves.”

Notable examples of higher yielding investments completed in the UK during 2010 includes the sale of a Focus DIY Ltd unit in Tamworth to London and Stamford for £33.3 million, reflecting a Net Initial Yield of 9.50%. Standard Life also purchased a modern distribution unit, let to Tesco for a further 6 years, from Charterhouse Investments for £14 million, reflecting a Net Initial Yield of 8.00%.

“Following a sluggish January, there has been significantly more activity this month within the multi-let market, with demand almost exclusively coming from UK Institutional Investors. Despite rapid yield compression in the second half of 2009, investor demand has remained strong in this sector due to the inherent asset management and value-add opportunities available. Continued demand and competition for limited stock at the prime end of the market has meant that investors are beginning to consider more risky assets in order to spend their equity allocations. If the property fundamentals are strong then a higher void rate is becoming increasingly acceptable,” commented Mackay.

While demand in the occupational market is still coming from traditional occupiers such as retailers and third party logistics suppliers, increased corporate awareness of climate change issues is creating demand from a variety of companies involved in this sector. Waste companies are emerging as new key drivers of demand, with a number of lettings agreed to companies such as Cyclamax and Biffa Waste.

Paul Farrow, Head of UK Industrial Agency, CBRE, said: “Occupiers who had previously placed property strategies on hold are beginning to take action and acquire new space. However, this will have the effect of further reducing supply levels and, when coupled with a lack of speculative development, it will inevitably lead to under supply in a number of prominent industrial locations across the UK. Developers are more likely to develop new schemes on existing land banks rather than buy new sites. This will act to further exacerbate any potential undersupply that may emerge during 2010 and until there is a marked improvement in the availability of development finance and proof of a sustained demand within the wider occupational market. We believe that the first developers to make the commitment to speculatively develop will find considerable success due to the lack of new product on the market.”

source : CB Richard Ellis