Blog: Perfect market emerges in industrial property

Jamie Fergusson, partner at commercial property consultants Knight Frank explains why internet shopping is creating a fertile market for industrial property.

Changing shopping habits are often highlighted as one of the main factors behind the decline of the high street. While some might think that it’s therefore also bad news for the property world, the growth of e-commerce is actually fuelling a boom in a particular part of the market.

It’s fair to say that demand has seldom been higher for industrial property – sheds, warehouses, distribution hubs, and other sites of that ilk. Money is chasing after the sector because investors firmly believe it still has huge growth potential. This is no better captured than by two recent industrial investment sales in Scotland, which both attracted in excess of 12 bids by their closing dates.

Yields are also hardening: a sure-fire sign of a strong market. Kingston Bridge Trading Estate and Oakbank Industrial Estate, both within 1.5 miles of Glasgow city centre, have achieved yields of 6 per cent and 6.25 per cent, respectively. In a world of stubbornly low interest rates and minimal returns on cash, that might sound generous. But, when you compare it with yields of 8 per cent or 9 per cent on mixed-use city centre buildings in Glasgow, industrials seem expensive.

It would be logical to ask why investors would actively pursue assets with a 50 per cent lower annual return. It can be put down to one belief: a perfect storm is brewing in the market. Supply is very restricted – vacancy rates in the Glasgow area, for example, are astonishingly low; sitting at around 1.3 per cent for stock built since the turn of the millennium.

At the same time, very little new stock is being built. In most locations, the economics simply don’t stack for major new development: it costs as much to build a shed as a developer will realise upon sale. So, although there is the occasional speculative development, new requirements have far outstripped new space coming onto the market for the past few years.

In fact, occupational demand has been buoyant. Growing small and medium-sized companies are increasingly looking at industrial property to facilitate their growth, rather than office of retail accommodation. Meanwhile, the continued growth of e-commerce is driving up demand for last-mile delivery space, typically in the core areas of larger towns and cities. That’s only likely to continue as delivery services grow in line with people’s shopping habits.

This is happening across the UK, not just in Scotland. And, while we’re approaching the point where speculative development may become viable, the depth of interest suggests there’s little sign of the market topping out.

In fact, the only question seems to be what the future of industrial property looks like. While we’re increasingly moving towards a requirement for distribution hubs in urban environments, where there’s also need for more housing, last-mile delivery solutions may need to evolve to include other types of property, including retail and residential sites.

A perfect market is emerging in industrial property – though it’s changing, rents seem to be on an inexorable rise. Interest from investors can only go the same way.