What are the realities of the big shed market for occupiers post-Brexit. Liza Helps reports.
It was as though the market was holding its breath prior to 23rd June 2016 and across the board property pundits were reporting a definite slowdown in take up despite seemingly strong demand.
According to Cushman & Wakefield’s Industrial Market Snapshot ‘take-up and investment volumes had been falling in the run up to the referendum in June’. Indeed the figures seemed quite dramatic with Knight Frank’s LOGIC research for the first half of the year noting that, while 16.2 million sq ft of units above 50,000 sq ft were being acquired for occupation, this was 14 per cent down on the previous half year, and four per cent down on the same period in 2015.
Charles Binks of Knight Frank says: “We certainly saw a pre-Brexit slow down as occupiers and investors held off, awaiting the outcome.”
Steve Mitchell of Colliers International agrees: “At the start of the year the market fell away a bit across all sectors and size ranges, take up was down and transaction numbers were less than a year ago.”
Now some four months on and the market is very different, indeed one could almost say it was a complete ‘volte face’ with take-up back up to normal levels.
Mitchell says: “Normality has been resumed as far as big sheds are concerned, it is almost as if it has been reset post Brexit and we are as busy now as we thought we could be had the result gone the other way.”
According to Colliers International’s latest research, take-up for large units over 100,000 sq ft reached over 20 million sq ft in the first nine months of 2016; some 72 per cent of the total big sheds demand in 2015 (which reached 28.7 million sq ft).
Delving deeper into the numbers, JLL notes that 6.3 million sq ft of Grade A space over 100,000 sq ft was taken up nationally in the third quarter of the year; bringing take-up in the first nine months of 2016 to total 16.5 million sq ft in 62 units.
Demand [for Grade A space], notes the report, in the first nine months of the year was 23 per cent higher than Q1-Q3 2015 and 29 per cent higher than the average level of take-up in the first nine months of the year over the last five years (Q1-Q3 2012 – Q1-Q3 2016).
Tessa English of JLL says: “Occupational demand in the big box logistics market has been strong this year despite the Brexit vote in June. Demand in the first nine months of the year was only four per cent lower than the 2015 full year numbers. We expect this strong level of demand to continue into the final quarter of this year and 2016 to be one of the strongest years on record in terms of take-up.”
According to Savills, the UK warehouse market has had its best third quarter results since records began with take-up hitting 10.4 million sq ft across all sizes, 45 per cent higher than the long term average of 5.7 million sq ft and surpassing the previous high of 9.3 million sq ft achieved in 2014.
What’s more, Savills figures show that the total take-up of UK warehouse space to date this year now totals 26.2 million sq ft, nine per cent above the 2015 year-end figure of 24.1 million sq ft.
A note of caution is sounded by Charles Binks of Knight Frank, who says: “While everyone is saying that take up is in line with, and above, the five-year average, that is down to having a very dominant player in the market – Amazon has taken just shy of 8 million sq ft this year alone in both standing and pre-let stock, put that along side the amount it took up in the last six months of 2015 and it is very significant.”
Experts have put the level of take up by the internet retailer as high as 40 per cent of all take up in the last 12 months.
Amazon’s recent lettings include taking a 100,282 sq ft warehouse at Cherry Blossom Way Washington in Sunderland as an Amazon Logistics delivery station, a 271,350 sq ft speculatively built warehouse at MAG’s Airport City Manchester, which it is extending through use of mezzanines to 654,000 sq ft, as well as taking M&G Real Estate’s 176,080 sq ft speculative warehouse at Union Square in Trafford Park. It is opening another delivery station in Daventry and has secured a 310,000 sq ft facility at Prologis Dunstable scheme in the southeast. The new distribution centre will be operational by the autumn and was built speculatively by Prologis. It has achieved an EPC ‘A’ (12) rating and BREEAM ‘outstanding’ accreditation. Savills and Colliers International acted for Prologis.
The internet giant has also signed up for three build-to-suit fulfilment centres in excess of 1 million sq ft each. It has secured 1.1 million sq ft at Verdion’s six million sq ft iPort scheme in Doncaster (as well as securing a 215,600 sq ft facility with 10,000 sq ft of two-storey offices on a speculative basis) and has also agreed to take 2.2 million sq ft at Roxhill and Port of Tilbury’s 70-acre London Distribution Park in Essex, which will trigger the UK’s biggest industrial investment deal. The shed will be the largest and tallest warehouse in the UK at more than 70ft, with four floors, each of just under 600,000 sq ft. It will also feature a mezzanine on the first floor.
The company also pre-let a 1,053,000 sq ft facility at Mountpark’s Mountpark Bardon scheme in the Midlands off a 15-year lease at a rent of £5.75 per sq ft. The facility, which is due to be completed at the end of the year, has already been forward sold to an Asian investor through BNP Paribas REIM for a record breaking £125 million – the largest lot size for a single-let distribution warehouse in the UK. DTRE acted for Mountpark, while BNP Paribas Real Estate acted for the purchaser.
Amazon’s new UK manager Doug Gurr said in July Britain’s decision to leave the European Union had not affected its investment plans for the country.
The firm said it has invested more than £4.6 billion in the UK since 2010 and is expected to employ 15,500 people on a full-time basis by the end of this year.
Amazon says it is increasing the size of its UK distribution network to meet customer demand, driven in part by the 40 per cent growth last year in the number of independent businesses selling on Amazon and using its fulfilment services.
No one can deny that the growth in internet retailing is one of the dominant factors driving the UK logistics market at this time.
Tessa English of JLL says: “In the first nine months of 2016 the largest source of demand has come from retailers who accounted for 58 per cent of all floor space taken up.”
Mitchell notes: “Larger scale retailers are looking to service their burgeoning online offer reflecting consumer desire for continued on-line spending.”
The Range secured 55-acres from Delta Properties to build a 1.2 million sq ft warehousing facility earlier this year at Central Park near Bristol. The property will be developed by Stoford and is expected to be operational in 2017. Bilfinger GVA and Knight Frank represented Delta Properties. JLL acted for The Range.
In addition House of Fraser has submitted a planning application for the development of a new 750,000 sq ft distribution hub at Roxhill’s Gateway Peterborough scheme adjacent to the A1(M) motorway.
One of the latest deals sees 3PL Amethyst Group signing up for a 210,000 sq ft at Griffen UK Property Investment’s 59-acre distribution park in Wellesbourne, Warwickshire.
“This significant pre-let demonstrates the on-going demand for prime distribution and logistics assets in the UK, driven by the growing opportunity presented by the continuing growth of e-commerce in the UK,” says Rui Nobre, CEO at Griffen.
Amethyst took a 15-year lease with no breaks, at a rent of £6 per sq ft with an initial one-year rent-free period. The lease will benefit from a year-five upward only rent review.
The building will have 15m eaves, a 60knm floor loading, 50m yards, 18 dock and six level access (four double height) doors as well as 165 car parking bays and a 6 per cent office ratio. The building is due to achieve a BREAAM excellent rating on completion in Summer 2017. Griffen Development is responsible for delivering the scheme.
If that were not enough, DHL is signed up with Gazeley for a 1,085,475.782 sq ft facility on extension land at the developer’s Magna Park Lutterworth scheme in the East Midlands.
Looking to future demand, Dr Walter Boettcher, research director at Colliers International explains: “So far, industrial distribution looks to be more impacted by industry specific transformations than it is by any post-referendum impact.
“The evolution of basic retail supply from a high street / shopping centre focus to an internet based industrial distribution order fulfilment function will continue unabated.”
Richard Sullivan of Savills agrees: “The unprecedented growth of online retail and the changing face of consumer habits has meant that distribution and logistics is now more essential than ever before. Although certain sectors appear to dominate the industrial and logistics landscape, demand still remains high from a diverse range of occupiers and there remain a good number of unfulfilled requirements.”
While demand is obviously still there and looks set to continue there is a slight hitch for occupiers and that is the amount of stock available. The UK referendum has caused a hiatus especially in reference to the flow of new stock to the market. Richard Evans of JLL says:
“One of the outcomes of Brexit is that the rate of development of stock has decreased; we will see speculative development but perhaps not as much as this year and this could produce an issue of under-supply in parts of the country in certain areas such as the Southeast and East Midlands.”
The volume of speculatively-developed sheds of above 100,000 sq ft to be delivered in this cycle, according to Strutt & Parker, is expected to hit 14.2 million sq ft by the end of 2017, the amount going on from there is far from certain.
Charles Binks of Knight Frank explains: “On the funding side of things speculative space has been put back at least nine to 12 months, some funds were committed and those developments have gone ahead, others have reigned themselves in and will wait before forward funding further speculative development until the current stock has been taken up.
“In terms of funds who were possibly willing to commit many have been putting the decision back so that there is likely to be an available stock issue going forward further exacerbating the shortage of standing stock for occupiers.”
David Binks of Cushman & Wakefield is of the same opinion: “Funds in general have pulled the plug on speculative development. And in the next 6 – 13 months shortages are going to get tougher. Opportunities for occupiers will be less – so expect more D&B.”
According to Colliers International’s latest research: “As of October 2016, there was a total of 14 million sq ft big sheds under construction, including 57 per cent that has already been pre-let. As a result of increased levels of development, availability of distribution product has increased by 10 per cent year on year to the current 40 million sq ft.
“However, Grade a supply remains severely constrained at three million sq ft, with the
new/refurbished space representing just a few months of supply (based on average take-up levels). With those units that are available typically of secondary quality and in some cases no longer fit for purpose, design and build remains the only option in the majority of locations.”
Toby Green of Savills says: “There is speculative product planned but there has been a reassessment of a number of schemes following Brexit . We believe the supply/demand balance is still in favour of landlord therefore with strong take up levels those
considering/committed to speculative construction will continue but cautiously and only in prime locations.
“It should be noted though,” he adds, “that in this cycle there is far better analysis and awareness of competitors and their ability to deliver speculative space; funds/developers are more aware of competing projects and thus there is less chance of units being delivered into market where there is no demand.”
David Binks adds: “There are still those wanting to do speculative development but lack of funding is holding them back – the market is just not quite there, however, that may return. Funds will get their confidence back and cheese books will open.”
Speculative development announced and progressing since the Brexit vote include Griffen looking to commence with a third and fourth phase of speculative development at Wellesbourne comprising 50,000 sq ft and 70,000 sq ft, which will become available by HE 2017.
Rui Nobre of Griffen says: “Occupier appetite for both pre-let and speculative development schemes is unabated and we are looking at a number of different opportunities that should offer significant returns on investment, filling what we forecast to be a significant gap in the market, following the decisions by others to pause on projects post the UK referendum.”
Prologis has announced that it will speculatively develop a 275,000 sq ft at Prologis Park Marston Gate.
Located next to the 151,000 sq ft national distribution centre that Prologis is building for furniture retailer Dwell, the speculative facility will complete the second phase of Prologis Park Marston Gate.
Designed and constructed to achieve a minimum BREAM ‘very good’ accreditation and the best possible EPIC rating for its size, the building will include a rooftop solar installation that will generate 10 per cent of the building’s regulated energy. Construction will begin this month and the unit is scheduled for completion in the summer of 2017.
Andrew Griffiths, Managing Director, Prologis UK says: “This distribution centre is the largest single speculative building to be constructed in the UK since the Brexit vote.
“Although the referendum caused a hiatus in speculative development, demand has remained constant. Our customers trust us to deliver the buildings they need to run their operations as efficiently as possible and we aim to offer them the best opportunities on the market.”
Lambert Smith Hampton and Burbage Realty are joint letting agents.
Equally significant, St Francis Group and iSec are developing massive 580,000 sq ft speculative scheme in Bristol – the largest speculative warehouse scheme in the region for two decades.
St Francis Group and iSec are building out the first phase of a 1 million sq ft mixed use development at the 65-acre former Rolls-Royce East Works site in Filton to be known as Horizon 38.
The £120 million development is being built in four phases and funded by BP Pension Fund. Horizon 38 will consist of 27 units, from 3,800 – 115,000 sq ft with the first delivery of completed logistics and manufacturing space coming on stream in the summer of 2017 with later phases completed in 2018.
Letting agents are Bilfinger GVA and JLL
In addition Trevor Developments, in conjunction with funding partner, Aviva Investors Pensions, is launching a 94,500 sq ft speculative unit known as ‘Apollo’ at the Advanced Manufacturing Hub in Birmingham. The building is on schedule to be completed by February 2017.
Bob Attrite, managing partner of Trevor Developments, says: “The building is one of few, large, industrial buildings being built across the West Midlands for completion in early 2017 and with continuing strong demand from the industrial market we look forward to concluding terms.
Joint agents, Savills and Cushman & Wakefield, are marketing the development.
If that were not enough Mountpark has also announced that it will speculatively develop in Southampton.
The company has secured planning permission for a large logistics site formerly occupied by Ford UK.
The site, named Mountpark Southampton, is owned as part of a joint venture between Mountpark and USAA Realco, and was acquired in December 2015. The site is in two parts, with the smaller site (6.67 acres) now under offer to a single occupier.
Mountpark Logistics has been granted permission at the 18.7-acre main site for an industrial and logistics development totalling around 366,000 sq ft with units ranging in size from around 40,000 sq ft upwards.
Phillip O’Callaghan, managing director at Mountpark Logistics says: “This is a major milestone for Mountpark Southampton and we intend to speculatively develop the site in a range of unit sizes. As such it will be one of the first major speculative developments in the wider M27 corridor for a number of years – a boost for the surrounding area and the market as a whole.”
Letting agents are Bilfinger GVA, DTRE and Cushman & Wakefield.
Gareth Osborn of SEGRO says: “SEGRO is keen to provide speculative development where it is most needed, there is no oversupply in the market pre se. The market is carrying on, we are being cautious but demand is there and we are looking to crack on with a development programme – it was sensible to have a check in the market [following Brexit ].”
The company is launching SEGRO Park Rainham in London in conjunction with the GLA. The scheme will provide around 330,000 sq ft. SEGRO expects to break ground there in November with speculative buildings ready within 16 months for occupation.
While there are some restrictions on speculative funding at present developers and funds are still promoting sites and chasing down D&B.
“Occupiers looking for anything above 300,000 sq ft will have to go down this routes,” says Charles Binks of Knight Frank.
“Some occupiers though’” he adds, “are wanting to benefit from the value of their covenant and looking to realise maximum profit on any deal.”
He explains: “Basically an occupier will agree a land price then agrees with the developer for fixed price management fee to build the facility. All the differential between the costs and the end value derived from that long lease and covenant is all available to the occupier to plough back into the business.”
Arcadia Group secured land from Prologis at DIRFT III in the East Midlands for a 400,000 sq ft state of the art fulfilment centre at a price of approximately £40 million.
The intention is that Prologis will be retained to develop the facility ,and once complete, the property could either then be kept or else sold to a fund through sale and leaseback.
Funds such as Tritax are keen on these types of investment and have been known to pay handsomely. Only recently Tritax Big Box REIT raised £150 million to fund the purchase of three warehouses in the midlands and south east, paying £80.135 million for Euro Car Parts’ 780,977 sq ft distribution centre at Birch Coppice business park, Birmingham, £35.35 million for Whirlpool’s 473,263 sq ft facility at Warth Park in Northamptonshire, and finally paying £56.5 million for a 322,684 sq ft warehouse at Oliver Road in Thurrock, Essex let to the Co-Operative Group.
Deals such as this enable developers to progress sites to a level where they are deemed
‘oven ready’. The money from the sale of the land to Arcadia is expected to go towards kick starting the third phase at DIRFT, which has outline planning permission in place for an additional 7.86 million sq ft of space.
Richard Evans of JLL says it is important for developers to progress sites as far as possible: “It is the norm since the recession that as a minimum you try to prepare the site; sort the planning out, sort the access etc so the site is deliverable in a realistic time frame.
“If you leave the site without the ability to move forward quickly for an occupier you are out of the game – post recession, you sort sites out and prepare them as much as possible so you can react to the market. Investing in the up front infrastructure planning and utilities is imperative.
“It is basically stand-by positioning: ready, steady, bake!”
With so little speculative space coming to the market and a shortage of standing stock that is rapidly depleting the ability for developers to move quickly will be the single most important factor for occupiers.
Prologis is actively bringing forward its 65-acre Fradley Park scheme in the West Midlands. It has started infrastructure works worth £4.75 million to open up the site, which could accommodate up to 1 million sq ft. The largest single unit could be up to 700,000 sq ft. Letting agents are Savills, JLL and Harris Lamb.
Alex Verbeek of Gazeley says: “For the minute [Gazeley] is focused on controlling the controllables and bring that space and opportunities forward.”
The developer is progressing two major schemes; a 4.5 million sq ft extension to Magna Park Lutterworth in Leicestershire and a 60-acre second phase at Magna Park Milton Keynes. “The aim is to speed up delivery capability through planning and infrastructure.”
Hodgetts Estates is progressing a site along similar lines in the West Midlands. It has just secured detailed planning for a 345,400 sq ft warehouse to be known as Core 1 at its £70 million Core 42 distribution hub near Tamworth.
In addition to Core 1, the site can accommodate some 333,700 sq ft on five purpose-built development plateaux, with units ranging from 70,000 sq ft to 270,000 sq ft. Infrastructure works have already begun on site including a new direct access entrance onto the A5 trunk road.
The developer is looking to secure pre-lets across the site. Letting agents are Cushman & Wakefield and Avison Young.
Curtis Real Estate has its Midas 22 scheme in Leicestershire where it is creating development plateau that can accommodate up to 1 million sq ft. Cushman & Wakefield are sole agents.
Developer Canmoor is in Daventry with Mustang Park, a new three-unit scheme looking for pre-lets 47,890 sq ft, 108,975 sq ft and 171,180 sq ft. The developer is busy getting the sites ready for eventual plateauing and ancillary infrastructure. Joint letting agents are Cushman & Wakefield and JLL
Working with joint venture partner Roxhill, SEGRO is progressing with infrastructure works at Junction 10 Business Park in Kettering just off Junction 10 on the A14 trunk road. The 90-acre site can accommodate up to 1.25 million sq ft and will cater for units of up to 275,000 sq ft. Buildings could be available from 2017.
In the north Citrus Durham Ltd has invited contractors to tender for the first phase of infrastructure works at its 200-acre site in County Durham known as Integra 61.
In April this year the site received outline planning permission for a multi-million pound, mixed-use scheme that will include up to 2 million sq ft of employment space.
Proposals for the site, which is located adjacent to junction 61 of the A1(M) at Bowburn, include large industrial and distribution units, a 70-bedroom hotel, a residential care home, restaurants, a GP surgery, roadside retail units and up to 270 new homes.
The infrastructure works include a major new roundabout on the A688, together with internal estate roads, earthworks, services and landscaping. It is anticipated the successful contractor will be appointed early in the New Year.
David Cullingford, development manager at Citrus Durham said: “We intend to be on site with the first phase of infrastructure works in March 2017 and once complete we will have fully serviced sites available, meaning that we can deliver properties designed to suit occupier’s specifications as early as Autumn 2017.”
Letting agents on the scheme are Naylor and Avison Young.