2013 was a record year for distribution warehouse investment with approximately £2.5 billion transacted, which is an increase of nearly 50% on 2012, according to research from Savills.
The international real estate advisor notes that this rise was driven by a continued growth in demand for the sector from an increasingly diverse investor group from the UK and overseas.
James Williams, investment director at Savills, comments: “Interest from investors in the logistics sector has gained incredible momentum over the last 12 months. While UK funds and REITs have dominated the market, we are also seeing increasing interest on a global platform from a diverse range of buyers from the USA, Russia, the Middle East and South Africa.
“This rise in demand has inevitably generated strong yield compression and resulted in distribution warehouses outperforming all other property sub-sectors in 2013, according to IPD, with returns of 15.2% being delivered.”
Research highlights yield compression was visible across all income lengths in 2013 with short to medium term income deals moving in by up to 150 bps on prime property, compared to the previous year.
This is, in part, a reflection of a rise in confidence from investors in the ability to re-gear / re-let a property against continued growth in the cost of moving and reducing supply of available alternative properties.
Key deals that took place in 2013 include: ProLogis’ acquisition of a £247m portfolio from London Metric, Gazeley Properties’ funding of John Lewis at Magna Park in Milton Keynes to Aviva Investors for £76.5 million with a niy of 4.90%; Henderson’s acquisition of RD Park, Hoddesdon for £74.5m at 6.80% niy; the sale of Next’s Distribution Centre in Rotherham to Legal & General for £89.9m at 5.50% niy and the purchase of Marks & Spencer Distribution Centre in Castle Donnington by Tritax Big Box REIT for £82.57 million, reflecting a niy of 5.20%.
Andrew Bull, industrial director at Savills, says: “Looking forward we anticipate investor demand will remain strong for the logistics sector, buoyed by a continuing improvement and confidence in the occupational markets. In addition, the absence of a loosening in supply of suitable investment stock will ensure yields remain robust during 2014. Further yield hardening is possible over the short term however we do not expect to see it on the same scale as 2013.”