Commercial Property Review – November 2023

ESG credentials come to the fore in the industrial and logistics sector  

November’s UK Commercial Market in Minutes from Savills has highlighted the continued robustness in the industrial and logistics sector, despite a reduction in take-up during the year due to economic uncertainty.  

The weaker demand has given warehouse space occupiers the opportunity to be more selective about their requirements, which has created a ‘significant gap when it comes to prime and secondary rents as businesses look to prioritise ESG credentials,’ according to the report. As occupiers focus more than ever on the quality of space, ESG requirements have become a key consideration for all third-party logistics providers to succeed in gaining customer contracts.  

The financial benefits to firms from efficiencies derived from acquiring Grade A space, mean it’s now near the top of the wish list when it comes to tenants selecting a new warehouse unit. Occupiers are also appreciating the benefits in attracting and retaining staff that a contemporary, well-specified building can provide.  

From a rental perspective, although supply is rising, prime unit rents are still rising, recording a 5.8% increase, versus 0.3% for secondary space. With take-up of second hand stock lagging and achieving rental levels lower than prime units, landlords and developers need to be mindful of the requirement for redevelopment or refurbishment of stock to satisfy potential occupiers’ ESG requirements. 

Retail recovery ‘yet to begin in earnest’ 

The latest Royal Institution of Chartered Surveyors (RICS) market update indicates the resilience of retail transaction volumes in Q3, reaching a five-year high of £1.9bn.  

Although retail volumes have experienced a more positive period, yield data from CBRE indicates ‘a turnaround in the retail sector has yet to begin in earnest.’ At a headline level, retails yields average 7.2% at present, versus 6.5% at the start of 2023. 

Scottish commercial property investment likely to ‘pick-up’ in 2024 

Colliers recent Property Snapshot of the Scottish Commercial Market shows that during Q3, investment volumes slowed from £500m in Q2, to £330m. This figure is approximately 33% below the 5-year quarterly average.  

In the year to the end of Q3, total investment volumes registered £1.1bn, this is a 47% reduction on the 2022 Q1-Q3 figure recorded. Year-to-date (end Q3) from a sector perspective, 32% of investment activity can be apportioned to the retail sector, followed by 26% for offices and 15% for industrial. 

During the third quarter, a total of 32 deals were transacted, the average lot size of which was £10m, a reduction from an average of £13m the previous quarter. According to the report, transaction volumes have been hindered by a ‘scarcity of accessible financing options,’ with a recovery heavily dependent on a combination of lower debt costs and bond yields, plus a recovery in asset process. 

Looking ahead, Colliers believe that investment activity is ‘likely to remain subdued’ during the fourth quarter, but into 2024 they’re expecting ‘a pick-up… when investor sentiment improves, and interest rates and inflation continues to fall.’ 

It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission.