Industrial warehouses yield prime office promise

What’s the difference between a towering office block in the heart of London’s Square Mile and a humble distribution warehouse beside the M6? In terms of yield, the surprising answer is not a lot. In June, funds managed by Brookfield Asset Management spent £635m on 30 Fenchurch Street, EC3, a landmark 18-storey, 550,000 sq ft office tower that transacted at a yield of 4.5%. The long leasehold for the nearby 3 Minster Court – a neo-Gothic, 11-storey building – is set to be sold at a similar yield to ARA Asset Management’s Suntec REIT. But so too is a 475,000 sq ft Argos warehouse in Stafford, with 5.7 years to lease expiry, which was snapped up by Goldman Sachs and asset manager Canmoor earlier this year. Can a boxy distribution centre really be stealing the thunder of prime London offices? Real estate professionals might have been perplexed by such symmetry in yields a decade ago, but the online shopping boom has driven industrial yields to historic lows – and shows no signs of letting up. On the other hand, businesses are still pondering an uncertain future for office working after the pandemic. Closing the gap Where income-producing assets are concerned, the April sale of an Amazon logistics hub in Hinckley, Leicestershire, to Aberdeen Standard Investments represents one of the sharpest industrial yields seen so far this year, transacting at around 3.1%. A deal for prime St James’s office Cassini House, SW1 – paces away from the Ritz Hotel – took place at a yield of about 3.2% in recent months. The average prime yield for industrial multi-let estates in the UK levelled with West End offices at 3.25% in July, according to the latest research from Savills. Industrial and distribution properties linked to open-market rent reviews followed closely behind, at 3.5%. City of London office yields continue to lag their industrial counterparts, staying static at 4% for the past 12 months. Under pressure Will industrial yields maintain this trajectory? Demand shows little sign of easing. Savills’ research shows industrial assets received the highest volume of investment during the period, totalling £9.7bn or 31% of the total across sectors – more than double the 14% share of 2018. With the race for industrial space intensifying, yield compression looks set to continue amid rising rental levels and an ongoing shortage in new warehousing supply. Kevin Mofid, head of industrial research at Savills, says the widespread construction materials shortage will exacerbate the issue. What’s more, online retail is not the only factor driving momentum. Manufacturing companies are increasingly considering “just-in-case” supply chains after the pandemic. That could result in even more demand for space. “This heady mix of ever-increasing occupier demand and low levels of supply leads us to conclude that many rental growth forecasts are underestimating the localised market conditions which ultimately drive rental growth,” Mofid says. He adds: “The drivers of low supply and high demand in the occupational market show no sign of changing in the medium term, which in turn will allow investors to underwrite their acquisitions with increasing rental growth assumptions.” Investors will have to strike deals with ever sharper yields for a foothold in the market, but with the assurance of a solid income stream, it is little wonder they are turning in their droves to industrial. To send feedback, e-mail pui-guan.man@eg.co.uk or tweet @PuiGuanM or @EGPropertyNews Photo: Fred Romero Creative Commons