Frontier sectors are central to the UK’s Industrial Strategy. Our latest research reveals where growth is concentrating, and what leaders can do next.
Industrial Sector
China’s rapid rise across both high-tech and labour-intensive exports is reshaping global trade and squeezing competitors — but which countries and industries are most at risk?
US tariffs under a Trump presidency and a Republican-led Congress are a major concern for China. However, we expect additional US tariffs wouldn’t be implemented until as late as 2026 and the effects could be mitigated early on by expansionary fiscal policy in the US.
Based on our analysis, most investors are likely to allocate heavily towards industrial and away from offices over the next five years.
The life sciences industry makes a major contribution to the UK economy. One in every 121 employed people in the UK works in the sector, which in 2023 contributed over £13 billion to the national economy.
Our expectation for the US industrial sector to outperform other major commercial real estate sectors is predicated on the persistence of e-commerce sales growth supporting US warehouse demand. Over the next five years, we predict industrial total returns will average 6.9% per year, compared to all-property returns of 6.4%.
While we believe interest rate hikes are mostly over, interest-sensitive sectors are being weighed down by the cumulative impact of past hikes, which combined with a weaker global economy is creating headwinds for industry.
While we expect that sector selection will still be an important component to generating alpha in commercial real estate investment, we think the thematic drivers that are likely to support outperformance over the next decade will require more emphasis on selecting for geography.
Our new global relative return index (RRI) signals that commercial real estate (CRE) investment opportunities should slowly and selectively emerge next year before becoming more widespread in 2025. At this point, our baseline expected returns move higher than required returns, pushing the global all-property index above the 50 mark.
The global economy has been in a ‘slowbalisation’ in recent years. For real estate investors in AEs, this policy shift could present compelling long-term opportunities in the industrial sector.
We are adding a depreciation risk premium that incorporates climate transition risk to our required returns framework.
Introducing our Industry Climate Service to help clients quantify the impacts of climate change and associated mitigation policies on output and energy use trends across more than 100 sectors.
German industry has been successful in reducing its consumption of gas relative to previous years, particularly in the second half of the year.
Following the loss of Russian pipeline gas, European countries have increasingly focused on LNG shipments as a replacement, giving Europe a safety buffer this winter.
Russia’s shutdown of natural gas flows to Europe has resulted in skyrocketing regional prices. This has contributed to a significant downgrade of our global and national economic growth forecasts and will impact European industry negatively.
Soaring debt costs across advanced economies threaten to push commercial real estate markets into distress. DM REITs are likely to remain under pressure in this environment, but look well positioned due to the combination of low leverage, limited near term debt maturities, and steep discounts to NAV.
The cost of debt for real estate has risen steeply in recent months, as credit conditions tighten, loan margins widen, and recession fears start to bite. Consequently, the implied prime yield required for a levered acquisition has risen 100bps-200bps since Q1 in key cities.
