The UK’s industrial and logistics sector is maturing as a cornerstone for economic growth, driving investor interest and job creation.
However, as government pressures to meet housing targets intensify, the long-term trajectory of this investment proposition remains uncertain when it comes to land allocations. When it comes to a seat at the table, of course residential always has a place, but here’s my case for why industrial and logistics deserves one too.
As a vital contributor to the national economy, the industrial and logistics sector now employs around 2.7 million people in the UK, offering stability amid turbulent times. Investor enthusiasm has continued unabated, particularly as prime industrial rents are growing above the rate of inflation thanks to the undersupply of prime stock and persistently strong demand for high-quality, well-located space. The third quarter of 2024 saw a 6% rise in investment volumes quarter-over-quarter, reaching £2.6 billion – a significant 22% increase from the same period last year. International capital has been a major force behind this surge, with cross-border acquisitions contributing over £1.5 billion. This robust international participation underscores global confidence in the UK as a stable, lucrative market for industrial real estate.
Notable high-profile deals, such as Lone Star’s acquisition of the Project Tiger portfolio and Prologis’s purchase of a £125 million industrial and retail park in Park Royal, highlight the sector’s appeal. The influx of international capital, which comprised 53% of market share over the past year, is intensifying competition, especially for assets deemed to have significant inherent reversion.
Supply Constraints
The UK has 56.9 million square feet of industrial space available for lease, which, while stable, remains constrained given rising demand. Grade A spec buildings, which make up 45% of available stock, are especially desirable, particularly in the Midlands – a central logistics hub.
Leasing activity for “big box” spaces (over 100,000 square feet) reached 6.5 million square feet in the third quarter of 2024, marking a 20% year-over-year increase. Major occupiers like B&M, Tesco and Sizewell C are among the recent players signing large-scale deals, with B&M taking on 674,000 square feet at Ellesmere Port, and Sizewell C securing circa 1 million square feet at Orwell Logistics Park, Felixstowe. Although we continue to see occupier interest across the UK, this has not been uniform with the Midlands and North West being disproportionately favoured over southern England.
Demand for logistics and warehouse space shows no sign of slowing, especially with the continued expansion of e-commerce. However, supply is struggling to keep pace. While speculative development is modest, it’s expected to contribute around 10.2 million square feet of new industrial space by the year’s end. Noteworthy projects by developers like Panattoni in Milton Keynes and Sittingbourne aim to address the sector’s supply shortfalls, especially in the North West and South East regions. Yet, with only four new big-box developments exceeding 500,000 square feet, the sector continues to operate under tight supply conditions, particularly for occupiers looking for the largest spaces. This scarcity, particularly of high-quality Grade A spaces, is putting upward pressure on rents as companies prioritise properties that meet environmental, social, and governance standards.
With supply constrained, rental growth is likely to persist, boosting local economies and creating job opportunities. However, industrial use often faces competition from residential for scarce land, with housing targets potentially having primacy over industrial development. The reality is that new homes create demand for warehousing, as retailers require space to house stock to meet residents demand for a quick, accurate service.
The economic impact of the sector is profound. Its resilience in a post-pandemic landscape has cemented it as a linchpin for growth and supply chain stability. Diverse occupiers – from logistics firms to retail giants – are driving demand for advanced facilities. Evri, for example, has expanded its footprint for the third consecutive quarter in the third quarter of 2024, and the company plans to add 8,000 staff ahead of the holiday season.
Regionally, hotspots such as the Midlands, the North West and Greater London continue to lead sectoral expansion. The East Midlands’ Nottingham 360 development recently added substantial Grade A space to the market, reflecting the concentrated demand in these high-growth regions.
Policy Landscape
The policy landscape will be a key factor in shaping the sector’s future. Planned changes to the National Planning Policy Framework reflect the importance of industrial development in strengthening the UK’s supply-chain resilience and reducing dependency on imports. Loosening land constraints in high-demand areas could catalyse further development, injecting local economies with a much-needed boost and positioning the UK as a competitive logistics hub.
The government has also acknowledged the economic benefits of industrial and logistics development, evidenced by the latest proposals in the NPPF around easing planning restrictions in green belt areas. Such changes could unlock additional land for industrial use, meeting the sector’s spatial needs and supporting sustained growth.
Yet, risks remain. The sector’s risk premium over gilts is low, limiting further yield compression. Moreover, long-term inflation expectations have risen following the government’s autumn budget, and the outcome of the US presidential election, which may keep interest rates higher for longer. At a local level, while the new government’s direction of travel is admirable, we are still seeing industrial development on green belt land rejected, such as Langtree and Panattoni’s plans for a 3.1 million-sq-foot development in Warrington.
Policymakers will need to strike a delicate balance, supporting the industrial sector growth while addressing priorities like the need for more housing and ensuring a sustainable pace of industrial development.
Looking Ahead
The UK’s industrial and logistics sector is positioned for sustained growth, backed by strong investor demand and a critical role within the nation’s economic framework. With cross-border investment and leasing activity robust, this sector reflects a confident market adapting to global economic shifts.
The recent investment transactions and high-profile deals of the third quarter of 2024 indicate that the sector has successfully adapted to the UK’s inflationary environment and above-target interest rates which have stunted investment in commercial real estate over the last two years. Looking ahead, the sector will likely continue to attract investment, fuelled by forecasted rental growth and constrained Grade A supply.
For policymakers, fostering this growth through supportive land-use policies flexibility in the planning system will be crucial to maximising the sector’s economic contributions.
Ultimately, the industrial and logistics sector represents a linchpin in the UK’s economic landscape, providing jobs, strengthening supply chain resilience, and positioning the country as a pivotal player in a rapidly evolving global logistics ecosystem.
As investors and policymakers navigate the coming years, the focus should remain on enabling this resilient sector to reach its full potential, ensuring the UK remains at the forefront of industrial innovation and economic growth. To meet the demands of the future, policymakers must embrace flexible land-use policies that prioritise the sector’s unique economic contributions.
This article first appeared in CoStar.
