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The recently published MSCI Index for September shows commercial property returning 10% year to date. Capital growth has been a robust 6.4% with industrials/logistics leading the way with 15.1% capital growth and an annualized return of 24%.

Logistics yields have continued to compress with yields of 3%-4% becoming prevalent for the sector. Annualised rental growth of 5.9% for the sector probably justifies these low yields for the moment  but are they sustainable? The short sellers that have emerged at specialist logistics developer and investor Tritax Group may indicate a calling of the market. Furthermore, as the economy normalises and physical retail becomes more prominent again, online sales have reduced from a pandemic peak of 36.6% in February 2020 to 28.1% in September this year.  

In the October Autumn Statement,  the Government announced further support for physical retail with an estimated 400,000 retail, hospitality and leisure properties becoming eligible for a 50% reduction in their 2022/23 business rates. Meanwhile, the Government continues to consult on an online sales tax in an effort to level the playing field between both forms of retailing.

Mayfair Capital has had a busy year both buying and selling in the logistics sector. In every case, valuation has been exceeded on sales with divestment decisions driven by concerns over assets becoming less thematically aligned through specification or locational factors potentially inhibiting occupier demand in the future. Such deficiencies (and in some cases future capital expenditure on sustainability factors) are being overlooked by buyers seeking exposure to the sector with significant weight of capital driving the market.

We have maintained our portfolio weightings (30% to 40%) through careful selection of properties in Avonmouth, Northampton, Stockport and Peterborough. All these assets are closely aligned with our thematic approach and have strong regard to sustainability criteria too.

Given market pricing, our future buying in this sector will be highly selective and focussed on property and environmental fundamentals. Amid the current spike in inflation, we will be monitoring the movement in gilt yields for a narrowing of the risk premium. In the industrial/logistics sector this could become stretched, even allowing for buoyant occupational conditions.  It will only be the industrial assets most attractive to the occupiers of tomorrow that will be able to generate the rental growth necessary to outperform.

James Thornton - Non-Executive Chairman, Mayfair Capital