We spoke to Douglas Cranston of HTA Real Estate who said: The North East
Turbine Business Park, Washington
Industrials continue to be the most sought-af- ter sector for a large proportion of investors, largely down to the sector’s strong and con- sistent performance. Robust rental growth, buoyed by the lack of supply, has ensured returns have consistently outperformed other property sectors. With UK average rental growth between 3.50% - 5.50%, and this trend expected to continue over the next five years, the outlook for the industrial investment mar- ket looks positive. Investors will always pri- oritise sectors where they can achieve yield performance via income growth.
Challenges
A considerable challenge, based on the high demand for industrial investments, is the difficulty in identifying and securing quality stock. This is largely down to a misalignment between vendors aspirations in price expecta- tions and investors’ view of where the market is at present.
At the prime end of the market, we see evi- dence of this gap being bridged, particularly for modern, well specified and securely-let stock. For anything slightly secondary, it feels like there remains anything between a 50 – 100 basis point difference between ‘buyers’ and ‘sellers’. A further drop-in interest rates could be the catalyst to closing this gap and would quickly and significantly increase the investor pool targeting assets across all tiers of the industrial investment market. Whilst on the face of it this would be positive, as it will increase the volume of transactions, thus further improving confidence in the market, it does then create a juxtaposition as it becomes increasingly challenging and competitive when trying to secure assets. There is a school of thought that there may be a benefit in trying to acquire assets now while there is a smaller buyer pool. As always, good advice is critical in securing the correct assets that align with an investors risk and return profile, at the most profitable time in the property cycle.
COMMERCIAL PROPERTY MONTHLY 2025 Themes
Unfortunately, a recent theme that has become more prevalent in the industrial sec- tor is the lack of speculative development in the pipeline. Increased construction and debt costs have meant fewer developments com- menced in the last 18 to 24 months. Looking forward, with further rate cuts anticipated in 2025, lower financing costs could be the cat- alyst to an increase in development activity. This will then create availability of higher qual- ity assets for the wider investment market.
We are seeing evidence of vendors apprais- ing sites and trying to judge when to com- mence speculative developments again. It is undoubtedly a difficult balancing act to weigh up the increased build costs versus the pro- jected rental growth. The significant dearth of pipeline will in our opinion mean those developers who are brave and jump early will reap the benefits of a lack of supply. There is unquestionably a shift in focus towards locations with high occupational demand and limited supply. Where speculative devel- opments are taking place, Institutions are ensuring the best-in-class ESG credentials to futureproof assets.
Transactions & Conclusion
Demand for the North East industrial and logistics sector continues as evidenced by two institutional transactions in H2 2024.
In one of the largest transactions of the year, Westbrook Partners, the global property investment manager, acquired Follingsby Park from L&G in a deal north of £116m, reflecting a net initial yield of 5.4%. Follinsgby Park is a 1.1 million square foot flagship light-industrial & logistics park in Gateshead. The property consists of 46 industrial units ranging in size from 4,000 sq ft to 135,000 sq ft and features best-in-class facilities and amenities for a vari- ety of tenant uses, including light-industrial, manufacturing, logistics, and warehousing,
Douglas Cranston
which HTA Real Estate have been proud to have been involved in the marketing of since its conception.
In addition, Harlyeford Capital acquired four units at Turbine Business Park in Washington, in a transaction in the region of £18m. This well-specified mid-box scheme, built in 2023, comprises of a four-unit scheme of industrial and warehouse units extending to a total area of 169,499 sq ft, which was sold by Copley in November 2024.
Both transactions show, where assets are modern (with good ESG credentials), securely let, with compelling real estate fundamentals
– there remains a significant weight of money chasing very limited stock, which can in turn lead to aggressive prices being achieved.
There is also a tier of investors targeting more asset management led opportunities where there is a lease event in c. 3 years time, whereupon they can get the benefit of the improved return as a result of an increased rent, ideally capturing a stabilised yield in the region of 7.50%.
Going forward, it will be interesting to see where investor demand sits for more dated stock, where significant capital expenditure is required to ensure ESG compliance. The difficult decision for investors in those situ- ations is whether they bear the cost of the capital expenditure now or exit and allow an ‘opportunistic’ buyer to take on the cost, although a discount would be needed to allow for the risk.
For more details please visit
www.htare.co.uk
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