Supply and demand mismatch offers excellent investment opportunities

It is a basic tenet of economics that wherever there is a mismatch between supply and demand, a business opportunity exists – and that is certainly the case when it comes to industrial property.

Bricks-and-mortar retail is emerging from the past 12 months significantly worse for wear and the complexion of the office market is likely to change (although predictions of the death of the office are very wide of the mark). Yet demand for industrial buildings is soaring – at a time when there is a scarcity of supply.

That demand is right across the spectrum – from 1,500 sq ft units right up to 75,000 sq ft and beyond. We have had significant interest in a 90,000 sq ft storage and distribution warehouse on which we were recently instructed. While the big units are certainly being snapped up, the sweet spot for demand is at the sub 3,000 sq ft.

This demand is principally being driven by a voracious appetite for warehousing and distribution space as Covid-19 accelerates the move towards online shopping. In addition, continuing uncertainty about post-Brexit supply is causing manufacturers to hold bigger inventories – and that requires storage space as well.

With the cost of borrowing so low and increased demand driving up rents, we are seeing a big increase in the number of occupiers opting to buy freehold. And given that the cost of servicing a mortgage is likely to be less than renting a building, it’s not hard to see why. But this trend is hoovering up much of the supply, leading to a shortage of leasehold properties, which is driving up rents even more.

Uncertainty over Brexit in 2019 immediately followed by the Covid pandemic has meant that there has been little speculative development over the past two years. This is likely to change in 2021, but new industrial buildings don’t appear overnight – planning and construction take 15 months on average, so even a building given the green light today won’t come on stream until mid-2022.

The opportunity in all of this is for the investor, whether in existing building freeholds or in speculative new builds. As ever, location is the key: the main shortages are around Norwich and along the A11 and A47 corridors. But with rental yields in the region of 6pc-7pc – even allowing for increasing freehold costs – the attractions for investors are obvious.

The flip-side, of course, is that occupiers looking for leasehold property are going to find themselves paying more than they were 12 months ago, and may have to look hard for the right premises in the right location. So not everyone is a winner in this supply and demand mismatch – but when it’s this way round, it does at least indicate a fundamental strength in the underlying economy.

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