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Spotlight on the Industrial Sector
Real estate investment has never been without risk, but for investors around the world, the UK market has always held great potential. However, many are only just realising the potential of the industrial sector. According to recent research by CBRE, £2.9 billion worth of transactions have already been completed in 2018.
The general consensus is that things are very positive, despite recent uncertainty in the retail sector. It’s been hard to miss big announcements around company voluntary arrangements (CVAs) and the relinquishing of assets on expensive sites from big hitters in the retail space, such as House of Fraser and Debenhams.
Understanding the challenges to the retail sector is the key to understanding the opportunity in the newest wave of industrial space: online shopping and the movement of goods.
The high street continues to feel the impact of changing consumer habits. With less physical footfall on the pavements, retailers require less physical shopping space. The result? Less demand for retail space and a sharp increase in the need for warehouse and storage space. Getting the logistics right is key however. Space that’s within easy distance of critical roadways or transport links is essential.
While this trend is building, the industrial sector has already stood up to challenges in the market. There were few substantial material tenant failures during the height of the financial crash between 2008-2010.
What does this mean for investors?
For investors, this kind of stability becomes extremely attractive, which is a surprising reversal of attitude from the last decade. Previously, signing a 20-year lease to a retail giant was seen as a low-risk investment; manage the property, keep the tenant happy, and the rent comes in. Now, in a time of uncertainty, it’s perhaps less attractive to have a huge department store in your portfolio – what happens in the event of insolvency and collapse? As well as the risk of lost income during the transition stage, there’s the problem of sourcing a new tenant and the massive undertaking of reconfiguring a 5-storey department store in the middle of a city.
Industrial space offers the ability to diversify portfolios with multiple tenants in the same property or estate, which further helps to mitigate risk. An industrial estate, for example, has the potential to host 20-30 different types of tenant with varying requirements of usage. Moreover, this potential means there will be a healthier demand for tenants. It’s a more flexible type of space, which smart investors are starting to realise.
This opportunity isn’t without risk. Short leases, a more frequent turnaround of tenants and maintaining a more diverse property requires strong asset management, which means this type of investment isn’t for everyone.
Location, location, location
Additionally, there’s a shortage of space and available properties, particularly within the M25. Historically there wasn’t a great deal of industrial space built after the financial crash, and since then, it’s both expensive and difficult to get planning for large-scale developments. While this makes it harder to get hold of the space in the first instance, it also results in higher rents for tenants who are desperate for the right space in the right location.
Geographically speaking, the industrial sector can work really well anywhere from Land’s End to John O’Groats. It’s a case of looking at market insights and matching the right asset to the right location. For example, in the West Midlands, there’s a strong demand for suppliers to the motor trade and associated industry. And, in more general terms, distribution means you need access to the motorway network for example a site on the M1 or M4 as well as a location in the north of England. This is evidenced by one of our most successful distribution clients based in Gateshead in the North East. Unsurprisingly, London remains an aggressive location to trade, thanks to a premium on space and an extremely high population density.
The key to a smart investment is understanding the practicality of the location for your clients. If you source what appears to be a perfect property on paper but then find out it’s only accessible by a dirt track from the deepest, darkest countryside then from a logistical point of view that’s never going to work. Tenants need to get their goods to their customers. They need to be close to centres of population, and the infrastructure that comes with that.
Read our Market Perspectives Report for more insight into the current state of the real estate market.