The multi-let industrial sector continues to offer a compelling investment rationale
Lismore Real Estate Advisors yesterday released its review of the Scottish investment market for Quarter 3 of 2023.
With a number of larger transactions, Q3 was more positive than anticipated, with activity trading at £398m, which is up 17% on Q2 of 2022 and 8% below the five-year average. There is an increase in stock coming to the market and Lismore anticipates that Q4 volumes are likely to be lower than the five-year average.
The key transactions in the quarter included the £62.5m (7.8% yield) acquisition of Craigleith Retail Park, in Edinburgh by US investor, Realty Income from Nuveen. Also in the capital, the prime mixed-use block, 40 Princes Street was bought by Remake Asset Management for £29.525 (7.5% yield) from Redevco. Scotland’s largest outlet centre was acquired by Global Mutual and Patron Capital for a price of £57m (14% yield), whilst pension fund manager, Weslayan, acquired a prime industrial asset let to Biffa at Eurocentral from Capreon for £6.74m (6.2% yield).
In terms of pricing, the gap between buyers and sellers has started to narrow. Confidence remains elusive but there is an acknowledgement that we are starting to “find a level” where valuers are more comfortable. Logistics and multi-let industrials remain stable, whilst offices remain the hardest sector to call with a real divergence of opinion on future prospects and where true value lies. Retail warehousing looks like offering good value and in the living sector, appetite remains robust, but the number of relevant transactions has been limited.
When looking at buyer activity, funds remain selective and quite opportunistic, with core-plus buyers starting to see some value in offices, leisure and retail warehousing where values have fallen to a level that debt can be accretive. Stock selection remains paramount, and the patience shown by opportunistic buyers looks like it will be rewarded in the not too distant future.
Chris Macfarlane, Director of Lismore comments:
“While there are encouraging signs at a macro-level, with interest rates peaking, inflation easing and build costs plateauing, it still feels like there are some challenges ahead, particularly for those with historic debt, grappling with the prospect of more expensive re-financing.
“The market will settle and we are anticipating an improvement in investment volumes, as confidence improves over the next 12 months. The recovery is unlikely to be uniform across all sectors but multi-let industrials seem to have weathered the storm better than others and are well-placed to see improvement. It offers good letting prospects, is less capex hungry and a lack of new development all make for a compelling investment rationale.”
Investors expect next year to be a buying opportunity in the multi-let industrial sector
Recently Lismore investor research showed that more than two-thirds of respondents will be seeking buying opportunities in the multi-let industrial sector during Q4, with property companies and investment managers, with 69% and 88% being most positive.
Over the next 12 months, 46% of respondents expect prime yields in the sector to remain the same, with considerable positive sentiment from investment managers with 56% expecting yields to harden. With prime yields having moved out by 150-200 bps, the sector should provide opportunity for the weight of capital targeting the sector to acquire prime assets offering genuine value.
When asked to rank the key drivers of occupational demand, location was identified as the most important by 54% of respondents, with macro-economic sentiment second on 34%. Surprisingly total occupational costs was a distant third on 9%,suggesting there is potential for rental growth to continue its upward trajectory. Only 3% of respondents identified ESG credentials as the key driver, suggesting that sustainability in the multi-let sector is still being driven by landlords.
For an expert view on the multi-let industrial sector, Lismore spoke with Will Lutton, Head of Investment, Industrials REIT who said:
“We have ambitious growth plans, so portfolio acquisitions will form the lion share of transactions by value. The multi-let industrial sector remains fragmented and we have always seen value in aggregating smaller individual estates along the way and we want to continue to benefit from this.
“In the short term, we expect rates to remain high and economic conditions to be uncertain, which may to lead to investment opportunities for well capitalised investors, as others struggle to refinance existing holdings. When the underlying risk free rate starts to come down as central banks get comfortable that inflation is under control and we move into a more normalised debt market, yields are likely to harden. In the short term, we anticipate rates remaining high and uncertain economic conditions to continue which may lead to investment opportunities for well capitalised investors.
Chris Macfarlane concludes:
“No sector has been immune from the wider macro-economic challenges and the effect that they have had on the market, however, it has not been a uniform slow-down. While the logistics, office and retail markets have seen more significant adjustments, the multi-let industrial sector has fared better. We predict that yields will stabilise into 2024 and investment volumes will increase in the sector as confidence starts to return.”
The full Lismore Quarter 3 2023 Review, including Research Findings & Expert Views is available to download from: HERE
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