How Are Land Values Recovering While Yields Remain Pushed Out?

Posted by Colliers on 11th September 2023 -


A few thoughts around the findings of our latest Industrial Rents Map H2 2023

The last 15 months have been another set of challenging months, following the wave of hyperactivity and scramble for space during the pandemic.

With an economy trying to make a post-pandemic recovery in a backdrop of a slowing global economy, a war within Europe, further pushing up the cost of living, particularly energy bills, between the end of last year and the beginning of this year we were facing predictions that the UK was going to deal with one of the longest recessions in history.

Thankfully that’s not materialised, the country has managed to avoid a recession, however inflation has been stubbornly high and the Bank of England has been rising interest rates to try to counteract this, so consequently industrial yields moved out between 150 bps and 200 bps and land values tanked by around 50% at the end of 2022. But what we’re witnessing now is that despite this outward movement, we’re seeing the early signs of recovery in land values in core locations.

The average price per acre across the UK has risen to £1.8m, up from £1.5m at the beginning of Q1 2023, although this is still down 36.9% on the market peak of Q2 2022. London and the South East have been most affected by the yield outer movement due to their higher land values. The average value in London is now at £4.95m an acre compared to £3.78m, while across the South East it’s moved to £1.64m from £1.46m.

There are several factors behind these increases including the resilient demand for space by occupiers, robust rental growth, as well as long-term confidence in the market.

Industrial occupier demand, sustaining rental growth

Demand from occupiers has been sustained across the first half of the year. Although occupiers are being more shrewd in their decision making there’s still activity taking place as the majority of large corporates now have made ESG commitments, so when a lease event occurs they’re on the look-out for a new space which fits the sustainability credentials they need to achieve.  

As such we’ve seen the UK average prime headline rent for large distribution warehouses (100,000 sq ft+) rise by 6.6% (six-monthly growth) and 10.1% (year-on-year) to £10.9 psf in Q3 2023. For smaller units and in the multi-let sector, rents grew by 4.1% since the firm last updated their map (and 9.3% y/y) reaching £14.2 psf.

Warehouse development

Development activity is at a peak at the moment with a further eight million sq ft of new available space set to hit the market by the end of the year. This has been fuelled by the pandemic race for space which saw vacancy rates drop to some of the lowest ever witnessed.

However with a slowdown in occupier demand, elevated construction cost, interest rates rises, the consequent yield expansion, and uncertainty over exit yields, this combination of factors has ultimately meant that build to suit occupier requirements have waned. But this is not resulting in a cause for concern just yet, as it is plausible to expect that the reduction of speculative construction starts we’re now seeing will create a pinch point as the new supply begins to be absorbed. As a result, our analysis predicts an increase in built to suit deals from the second half of next year – this again will help to sustain the rental growth we’ve been witnessing.

Market solvency has remained

There had been a fear that the economic pressures from interest rate rises and decreasing values could result in distress in the market and forced sales, however what we’re seeing is a well-capitalised market which is weathering the storm and so far there’s no widespread distress.

Vendor/buyer expectation gap

Landowners are holding out for a price that they think reflects their asset’s medium-term value, and actually there’s a fair amount of dry powder that has been waiting frustrated in the wings. So for the right opportunity, cash rich or low geared buyers are often able to bid competitively.

With the above in mind we remain cautiously optimistic there will be sustained rental growth and investors will look to position themselves on the right side of the real estate cycle as soon as there is confidence in the normalisation of monetary policy.

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