Fundamentals look good for I&L investors

Jonathan Holland is senior fund manager at L&G

After a period of turbulent repricing across real estate as a whole starting in 2022, the past two years have seen a rebound to positive returns and the growth prospects are highly compelling.

Last year, the UK industrial sector delivered a solid return of more than 8%, according to the MSCI Quarterly Index. The sector stood out in a market defined by investor caution and uneven occupier demand. What’s more, value-add industrial strategies outperformed the broader sector. For investors aiming for higher returns without stepping too far up the risk curve, value-add light industrial is potentially a sweet spot.

We favour urban industrials over regional big-box logistics, as the barriers to entry for mid-sized units in urban areas are higher. Our investment has been focused on mid-box and self-storage in recent years, and we are increasing our development programme, with eight new projects planned for 2025. Our team has been active in this sector for more than 25 years and the opportunity now is more attractive than it has been since the financial crisis in 2008-09.

Structural tailwinds, accelerated by recent global disruptions, are reshaping how supply chains operate. From Brexit to the pandemic and the Suez Canal blockage, a recurring theme has emerged: the need for resilience and proximity. Businesses have learned that just-in-time delivery models and far-flung production lines expose them to unacceptable risk. As a result, demand is surging for storage, urban logistics and industrial space closer to the end consumer.

Thumbs up: L&G’s West Cross Industrial Estate in Brentford received planning permission in November last year

In addition, the rise of ecommerce has been unstoppable. With online sales accounting for 25% of all UK retail activity and forecasts that this will grow to 31% by 2027, pressure on urban and edge-of-urban industrial space is growing. But the infrastructure isn’t keeping pace. In key markets, there has been a striking erosion of industrial land, much of it lost to housing. This imbalance is creating prime openings for investors with the capital and expertise to identify opportunities and unlock value.

The past few years have also seen increased demand for better-quality premises with higher sustainability credentials. There is a faster take-up of newer, more environmentally friendly assets (see Data, p9) and we can expect to see greater polarisation between units that meet these standards versus lower-quality stock. Value-add strategies involving active management, development or repositioning are well suited to this trend. They allow for investors willing to take the development risk to build estates from scratch, or undertake extensive modernisation of existing sites, to meet occupational demand and future-proof assets for the long term.

In a market where volatility and uncertainty are well documented, value-add industrial offers an attractive blend of stability and upside. For investors willing to get their hands dirty, figuratively speaking, it is one of the most compelling pockets of UK real estate.

Jonathan Holland is senior fund manager at L&G