Availability

■ Since the beginning of 2016, an additional 31 units totalling 5.3m sq ft have come to the market across the country, of which 1.9m sq ft is classified as new speculative development. Excluding build to suit, take-up of existing units in the first quarter reached 2.7m sq ft meaning total supply fell by 900,000 sq ft. Total supply now stands at 33.1m sq ft.

■ At a regional level, the East Midlands saw 1m sq ft of speculative units come to the market accounting for 55% of all of the speculative completions so far in 2016. In the North West an additional 1.2m sq ft of warehouse space came to the market, all classified as Grade B and C.

■ Of the core logistics regions Savills monitor, the highest supply is in the North West which has 40 units on the market totaling 6.87m sq ft, of which 82% are either Grade B or C. The West Midlands has just 2.8m sq ft on the market, down from close to 4m sq ft in 2014.

■ Even with an increase of speculative development the supply of Grade A warehousing continues to fall and now stands at just 9.8m sq ft, down by 4.9%. At a size level the recent letting of The Big 555 in Sherburn in Elmnet to L&G Homes now means that the largest units on the market are the former Matalan unit in Skelmersdale, which totals 391,000 sq ft, and the former Primark unit at Magna Park Lutterworth. This Grade B unit totals 411,613 sq ft and will be available for occupation in the autumn.

^{Source: Savills Research}

Take-up

■ 2016 has started brightly in the big shed occupational market, with any fears of a Brexit inspired slow down seemingly unfounded. Take-up reached 7.1m sq ft, which is both an increase on the last quarter of 19.5% and 26% higher than the long term first quarter average of 5.7m sq ft.

■ The market has however benefitted from two key factors, the large amount of build to suit (BTS) deals and the strong level of take-up for units between 100,000 and 200,000 sq ft. In the first quarter there have already been four deals over 500,0000 sq ft, compared to eight for 2014 in its entirety. This has ensured that BTS deals accounted for 59% of the market in Q1 2016. As Graph 3 shows however, take-up for smaller units is above the long term average too, demonstrating robust occupier demand across varying size ranges.

■ The picture at a regional level warrants further investigation as the spread of take-up has not been uniform. The deal allowing The Range to take 1.2m sq ft, combined with a further three deals ensured that the South West had its best quarter ever and meant that 2016 so far has seen more take-up than 2014 & 2015 combined. Against a long term average Q1 take-up of 1.2m sq ft across five transactions, the South East had a highly anomalous quarter with just one deal completing where DHL took 130,000 sq ft in Bedford. We do expect that the remainder of the year will return to average take-up levels as a number of large requirements find home and units under offer complete.

■ In our last edition we identified how the occupier market has, in the last five years, become more diverse with take-up being derived to a wider range of companies rather than being dominated by the supermarkets. However, given the amount of warehouse space that Amazon and other pure play retailers are now committing to the market could come to be dominated by online retailers increasing as their proportion of the market, which rose from 14% in 2015 to 27% in Q1 2016.

^{Source: Savills Research}

Development Pipeline

■ Since the start of the year there have been five speculative development announcements totalling 1.1m sq ft. The largest being Prime Omega in Warrington at 356,192 sq ft.

■ Taking into account speculative units previously announced Savills is tracking 7.1m sq ft of space across 38 units for delivery in 2016. Of those units 71% are between 100,000 & 200,000 sq ft and 13% are above 300,000 sq ft, the largest being 358,068 sq ft at Prologis Park Dunstable.

■ As Graph 4 shows, the development pipeline varies across regions with 36% of the stock under construction located in the West Midlands and a further 30% in the North West.

^{Source: Savills Research}

Investment

■ With many markets seeing investors take a cautious approach it bodes well for the rest of 2016 to report that investment volumes in the wider industrial sector increased on both an annual and quarter basis, the only sub sector to do so. Total investment reached £1.8bn, up 27% on the last quarter and 39% on the same period in 2015.

■ Looking at distribution warehouses in isolation also demonstrates a robust level of demand with total investment volumes reaching £683m, way above the long term average of £343m for a first quarter.

■ Whilst the deal count remained reasonably constant compared to the same period last year, and actually increased, 42 compared with 44, investment volumes were boosted by the £200m sale of the Phoenix Portfolio by IM Properties to the Malaysia's Employees Provident Fund.

■ With many global markets, for assets aside from real estate, now increasingly volatile we are starting to see a more diverse investor base for prime assets in the UK logistics market. Indeed, overseas investors accounted for 45% of all transactions in the first quarter of 2016, compared to just 17% in 2015. Increasingly logistics is being seen as a mature and global asset class and we expect overseas investor interest to increase.

■ The Savills prime yield for distribution warehouses is currently 4.75% having moved out 25bps in 2016. Investor sentiment to the sector remains strong but we are seeing investors become more discerning and targeting investments of scale or the most liquid of stock.

^{Source: Savills Research/Property Data}

OUTLOOK

■ With the first quarter of 2016 seeing above average take-up levels and occupier requirement levels remain robust we expect that 2016 will be another strong year. Crucially, deal count in the smaller size ranges is strong which, in the past, has been necessary for take-up levels to outperform long term averages.

■ The balance between constrained supply and strong occupier demand has seen rents rise in many markets. Rental growth forecasts from RealFor suggest an average of 4% growth for UK industrials, ranging from 5.7% in London to 2.4% in the North East.

■ Whilst speculative announcements have slowed we expect to see more schemes announced later in the year as developers wait for recently completed schemes to confirm tenants.

■ In our last edition we suggested a "new normal" for investment volumes will be £2.5 – £3bn per year. Q1 volumes put the sector in good stead to reach that target along with the fact that the sector remains largely insulated from the potential implications of the outcome of the upcoming EU referendum.

^{Source: RealFor}