Commercial Property Review

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, retail 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.

Commercial property currently for sale in the UK

  • London has the highest number of commercial properties for sale.
  • There are currently 1,921 commercial properties for sale in London, the average asking price is £1,318,078
  • Scotland currently has 1,185 commercial properties for sale with an average asking price of £344,245
RegionNo. PropertiesAvg. Asking Price
London1,921£1,318,078
South East1,608£704,523
East Midlands781£853,230
East of England929£603,395
North East883£346,956
North West1,464£406,384
South West1,829£591,882
West Midlands1,152£519,278
Yorkshire1,213£349,652
Isle of Man26£462,651
Scotland1,185£344,245
Wales881£457,438
Northern Ireland4£23,928
Source: Zoopla, data extracted 14 November 2023

Occupier Demand – Broken Down By Sector

commercial property review occupier demand
  • A headline net balance of -12% of contributors were reported for overall tenant demand over Q3, down marginally from -10% in Q2.
  • The negative trend continues for both the office and retail sectors, evidenced by net balanced readings of -19% and -25% respectively
  • A net balance of +3% of respondents noted an increase in demand for industrial space, which is the softest reading since Q2 2020.

Availability – Broken Down By Sector

commercial property review availability
  • Respondents continue to cite an increase in overall vacant space in both the office and retail sectors.
  • The use of incentive packages, such as rent-free periods, continues to climb in office and retail
  • A flatter picture has emerged for the industrial sector.

All details are correct at the time of writing (15 November 2023)

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View Last Months Commercial Property Review – October 2023