UK-focused Industrials Reit says it is still benefiting from constrained supply of multi-let industrial (MLI) estates, with the three months to end-March marking its sixth successive quarter of rental uplift above 20% on renewal or new letting.
With Industrials inking multiyear rental agreements that often do not include yearly increases, this represents an increase of about 5% on an annual basis, CEO Paul Arenson told Business Day, with no signs of demand letting up as the UK property market braces for rising interest rates to combat surging inflation.
“I think this will continue for a minimum of five years, but probably 10 years,” said Arenson, who thought a decade was a bold prediction.
“I just cannot see any new and meaningful supply coming into the market, there’s a scarcity of land and what’s available often goes to high-rise residential before it goes to multi-let estates,” he said.
Rent on leasing renewals rose an average of 22% to end-March, the group’s third quarter, with Industrials also reporting on Friday that it signed a record £2.9m (R57.7m) worth of total rental deals during the period, when inquiries also surged
The company, valued at R12bn on the JSE, has been pushing to become a specialist UK-focused group that provides work spaces for small- and medium-sized businesses, or MLI estates. About one quarter of its leases are renewed annually.
This is a property class that has benefited from constrained supply in the UK, even as businesses rethink their office and working needs, with the pandemic also giving a boost to e-commerce, accelerating an existing trend away from traditional store-based retail.
Arenson said demand-side structural factors were still much in the group’s favour, including the affordability, now less than £6 a square foot, which means rentals are often equivalent to what a small business in the UK would spend on its lowest-paid employee.
“There has been a move towards reindustrialisaton, with Covid-19 and the war in Ukraine, as well as surging energy prices, creating a push against globalisation,” he said.
Companies are often reluctant to depend on foreign suppliers, said Arenson, and were looking to find alternative local suppliers, even if this costs more. More companies were also looking to hold higher levels of inventory, he said.
While economic trends, such as rising interest rates and fuel costs, were a potential recessionary threat, this would just reduce demand from an occupier base that was increasing structurally, he said.
Leasing inquiries were up 13% during the quarter as the market came back to life after the Christmas period, Industrials said, but remain 20% below peak levels seen in March 2021.
Viewings were up 20% during the quarter and total transaction volumes were at record highs.
The group had a portfolio valued at £574m at the end of September, its half year, and acquired four estates in its fourth quarter, with a total value of £21m, and £40m worth of new assets in its third quarter.
Industrial’s shares closed up 3% at R40.20 on Friday, having fallen 8% so far in 2022, but rising a similar amount over the past year. Over the same period, the JSE’s Reits index had fallen 3.55% and risen 2%, respectively.
Update: April 29 2022
This article has been updated with additional information throughout.
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