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.