a a a a a a a a a a a

_UK industrial rental growth – A hedge against inflation?

Industrial rents are being driven by strong occupier demand, which is far outstripping supply, and the continuing shift to on-line sales in particular is driving demand for distribution space.

March 31, 2017

Intelligence

_UK industrial rental growth – A hedge against inflation?

Industrial rents are being driven by strong occupier demand, which is far outstripping supply, and the continuing shift to on-line sales in particular is driving demand for distribution space.

by Louisa Rickard
March 31, 2017

With inflation on the rise, strong rental value growth is protecting the value of industrial rents in real terms.

But for how long?

Industrial rents are being driven by strong occupier demand, which is far outstripping supply, and the continuing shift to on-line sales in particular is driving demand for distribution space. The IPD quarterly index shows industrial rents growing by 3.5% pa in the final quarter of 2016, and the latest IPD Monthly Index for February show an even higher annual increase in industrial rents of 4% pa in February 2017. 

UK inflation, on the other hand, is ‘cost push’ in origin - due to weakness in sterling that is now starting to feed through to the economy, This follows the sharp fall in the pound since the Brexit vote last summer which has raised the price of imported goods such as fuels, metals and food ingredients. This currency effect has combined with a rise in global oil prices to push inflation even higher in recent months, above the Bank of England’s 2% target. In fact the latest ONS data shows that CPI inflation rose to 2.3% in February, up from 1.8% in January, which compares with near-zero inflation throughout 2015 and 2016.

Additional cost pressures face occupiers of distribution space  – not least of which is the challenge to meet the cost of last mile delivery from the distribution centre to final destination, which is the most difficult and expensive stretch of a package’s journey and can account for a significant proportion of the cost of distribution.

Which raises the question – will industrial rental growth continue to move ahead of inflation?

Along with the rest of the commercial property market, industrial rental value growth is expected to slow. Our forecasts show industrial rental value growth slowing to around 2% in 2017. While UK inflation is expected to rise further.

There is still so much uncertainty in the UK economy, even though the UK is officially on its way out of the EU and Article 50 has been invoked, and sterling is likely to remain volatile until there is greater clarity about the UK’s Brexit deal. If inflation does exceed 3% later this year, this will put pressure on interest rates.

Our blog content is provided for interest only. It may be produced spontaneously, without the reviewing and editing often used for more formal publications. It may not be understood by a reader as it was intended. Any views expressed may be the personal view of the writer and do not necessarily reflect the view of Knight Frank LLP. It may include or be based upon information from a variety of external sources which have not been verified by us.

You read our content at your own risk and cannot rely on it in any way. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone for the content or for any opinion expressed and we will have no liability for any loss or damage resulting from any use of, reliance on or reference to the content.

© Knight Frank LLP 2016. Reproduction of our content in whole or in part is not allowed without prior written approval of Knight Frank LLP to the form and context within which it appears. Knight Frank LLP is a limited liability partnership registered in England with registered number OC305934. Our registered office is 55 Baker Street, London, W1U 8AN, where you may look at a list of members’ names. Please see our [terms and conditions] and [privacy policy] for more details.