industrial & distribution floorspace today

September 2010

Industrial & Distribution Floorspace TodayIndustrial & Distribution Floorspace Today

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INDUSTRIAL & DISTRIBUTION FLOORSPACE TODAY

“Welcome to the September 2010 edition of Industrial and Distribution Floorspace Today

This publication reports on the latest trends in the UK industrial market across Great Britain. Published twice a year in March and September, it presents our latest survey of availability, speculative development and prime rents for every region. Our industrial floorspace survey has been published since 1975 and provides an invaluable time series of industrial market data.

Our latest survey shows industrial supply declining for the first time in five years and with the UK economic recovery now gaining momentum, the market outlook is becoming more positive. However, with expectations of a subdued and fragile recovery, occupiers and investors are likely to remain cautious over the next six months and it will take time for market confidence to return.

If you require further information on this publication, or have a specific query relating to industrial property markets, please do not hesitate to contact me or one of my colleagues at King Sturge. Regional agency contacts are detailed on the relevant pages and on the inside back cover of the report.”

Anna BehanIndustrial Research

Executive summary

• Available industrial floorspace in Great Britain turned downwards for the first time in five years during the opening half of 2010. Tentative improvements in occupier demand coupled with slowing rates of release of secondhand stock, resulted in a decline in total floorspace available.

• At the end of June 2010, availability totalled 23.791 million m² representing a decrease of 0.6% since December. Whilst only a small reduction, it signifies a turning point in the current supply cycle and suggests that overall industrial vacancy is now beginning to stabilise.

• The Midlands recorded the largest reduction in available floorspace during the first half of 2010, as a number of big shed distribution transactions created a notable dent in the overhang of supply.

• The availability of new floorspace contracted by a further 14.0%, or 439,000m², in the six months to June 2010. New units now represent 11.3% of the overall available stock in Great Britain.

• Improved demand for the new big shed sector, and a slowdown in the return of secondhand big sheds, caused total availability in large buildings to fall. At the end of June 2010 there was 8.060 million m² available in units of 10,000m² and over, representing a decrease of 2.2% since December.

• In the big box distribution market, the supply of new units over 10,000m² fell by 288,190m² during the first half of 2010, with availability now 39% lower than its peak in March 2008.

• During the recent recession, occupier take-up for new units over 10,000m² slumped to a 15-year low in terms of floorspace transacted, but since the weakest period of demand during the first half of 2009, take-up levels have shown steady improvement.

• With development finance remaining relatively scarce, speculative starts are still rare, but an increase on the levels recorded in January suggests signs of a tentative uplift in developer confidence. An increase of 15% compared with January, brings the total under construction at the end of July, to 96,498m² across 48 schemes.

• The UK economic recovery accelerated much faster than expected during the second quarter of the year (GDP growth of 1.1%), marking the third quarter of positive growth. Whilst recent indicators have given a welcomed boost to the economy, expectations remain cautious with the recovery set to be subdued and fragile.

• According to the IPD Quarterly Index, average industrial rental values continued to fall in the first half of the year, although the rate of decline eased. Rents contracted by 1.1% in the first six months of 2010 and forecasts indicate an overall decline in industrial rental values of 2.1% this year, followed by 0.4% in 2011.

IDFT

King Sturge: Industrial & Distribution Floorspace Today

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Overview

AvailabilityThe total level of available supply turned downwards for the first time in five years during the opening half of 2010, following a prolonged trend of rising industrial availability in Great Britain, lasting for nine consecutive surveys. Tentative improvements in occupier demand, coupled with slowing rates of release of secondhand stock, resulted in a decline in total floorspace available.

At the end of June 2010, availability totalled 23.791 million m², representing a decrease of 0.6% since December. Whilst only a small reduction, it signifies a turning point in the current supply cycle and suggests that overall industrial vacancy is now beginning to stabilise.

Chart 1: Available industrial floorspace

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Source: King Sturge Research Excludes units below 500m2.Surveys taken in April, August & December. As from 2005, the surveys are taken in June and December.

Regionally, the most significant changes in supply were recorded in the Midlands, where availability contracted by 8.6% in the East and 3.5% in the West. The Midlands witnessed a number of large distribution transactions over the first six months of the year, creating a notable dent in the overhang of supply.

The South East and East Anglia also contributed to declining floorspace, with 0.1% and 1.0% less supply available in June respectively. The remaining regions recorded only modest increases in availability, with the exception of Wales where supply was 5.4% higher at mid-year.

Chart 2: New space as a percentage of total availability

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The availability of new floorspace peaked at the end of 2008 (at 3.523 million m² or 15.5% of the total supply) and fell by a further 14.0% during the first half of 2010, with development remaining very constrained. As occupiers took advantage of preferential terms offered on new stock, supply contracted by 439,000m² in the six months to June, to 2.694 million m². This is comparable to levels at mid 2007 and new space now represents only 11.3% of the overall available stock in Great Britain.

The return of secondhand large buildings to the market has slowed and the improved take-up in the new big shed sector, has caused total availability in large buildings to fall. At the end of June there was 8.060 million m² available in new and secondhand units over 10,000m², representing a decrease of 2.2% since December and the first significant depletion of large stock since the end of 2005. Whilst the supply of secondhand big sheds has been on an upward trend since mid 2008, the increase in the past six months was very modest. The big shed distribution section at the back of the publication, looks more closely at the market for new units over 10,000m².

Speculative developmentFollowing three years of declining levels of development, and an 18-month low of speculative completions, there has been a modest increase in the level of floorspace under construction. With development finance remaining relatively scarce, speculative starts are still rare, but an increase on the levels recorded in January suggests signs of a tentative uplift in developer confidence.

With an increase of 15% compared with January, a total of 96,498m² was under construction at the end of July across 48 schemes.

Chart 3: Speculative floorspace under construction

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The highest levels of development were recorded in the North West which accounted for 17.5% of the total for GB, followed by the South West and the South East contributing 15.6% and 15.4% respectively.

Chart 4: Speculative floorspace under construction by region at July 2010

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The economyThe UK economic recovery accelerated much faster than expected during the second quarter of the year, marking the third quarter of positive growth. Whilst recent indicators have given a welcomed boost to the economy, expectations remain cautious with the recovery set to be subdued and fragile.

The latest estimate for GDP in Q2 showed surprisingly robust growth of 1.1%, which was twice as strong as forecast, but

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with a surge in the notoriously volatile construction sector largely responsible for the buoyancy. As a result, many anticipate that this figure could be revised downwards in subsequent releases and that growth at this rate is unlikely to be sustained over the coming quarters.

The strength of GDP was still a surprise in a quarter dominated by the General Election. The emergence of a Liberal-Conservative Coalition after an inconclusive May poll, eased fears about policy drift and uncertainty. However it also brought with it an aggressive programme of spending cuts and tax increases in a June Emergency Budget that was tougher than many expected. The new Chancellor introduced an additional £40 billion of fiscal tightening, with aims to bring the current budget back to balance by 2014/15. This was generally welcomed by markets, though there remain concerns that the spending cuts are so severe that they may hit the economic recovery, acting as too severe a drag on growth over the next 12 months.

The UK Purchasing Managers Index (PMI), a lead indicator of economic activity, highlights that the strong rebound in economic output may subsequently soften. Figures for the service, manufacturing and construction sectors all weakened, with many businesses citing the looming public sector cuts as likely to hinder future orders. However, the manufacturing sector is holding up best, with increases in new orders resulting in a still healthy, expanding, PMI reading.

Business failures have continued to slow, since the most dramatic fallout recorded at the beginning of 2009. The number of company insolvencies as reported by the Insolvency Service, showed 20% fewer compulsory liquidations within England & Wales during the second quarter compared with the same time last year.

Labour market figures are also encouraging. In the three months to June, unemployment edged down to 7.8% of the workforce with 49,000 fewer people looking for work than in the previous three months. This continues the downward drift in jobless figures since the start of 2010.

OutlookThe Bank of England has held interest rates at the historic low of 0.5% since March last year, but as recovery proceeds, attention will increasingly turn to the outlook for monetary policy. Speculation about the timing of a rise in interest rates is increasing. All measures of inflation have risen since the end of 2009 but this largely reflects the effects of last year’s interest rate cuts and VAT rises. These effects should fade, though inflation is expected to remain fairly high over the coming months. Therefore, a move to raise interest rates is not yet justified by economic figures, or by

the fragile state of the UK banking sector, but many commentators expect hikes to begin in earnest early next year.

As a result of the radical spending cuts and fiscal policies, GDP forecasts have been revised downwards, with growth of 1.1% expected this year, followed by a revised 2.1% in 2011. However, with the strong rebound in GDP during Q2, these forecasts may be revised upwards in coming months.

As the economic recovery gets underway, albeit at modest pace, the outlook for the industrial sector is more positive. The market remains difficult and occupiers are cautious, but demand is expected to gradually improve as the economy gathers momentum. With national supply now stabilising and speculative development very constrained in the foreseeable future, the availability of new and good quality stock is rapidly diminishing. The return of secondhand stock has also now slowed, so in some regions the market is becoming increasingly favourable to landlords and developers.

Prime headline rents have generally remained stable across the country, but have been largely propped up by generous incentive packages on offer. In areas with supply side constraints, these incentives are now tightening and if occupier demand continues to improve, some upward movement in rents could be seen in selective locations towards the year-end.

According to the IPD Quarterly Index, average industrial rental values continued to fall in the first half of the year, although the rate of decline has eased, and 2009 is likely to mark the bottom of the rents cycle. Rents contracted by 1.1% in the first six months of 2010 and our central forecast indicates an overall decline in industrial rental values of 2.1% this year, followed by 0.4% in 2011. Positive rental growth is not expected to return until 2012, albeit at a modest rate of 0.5%.

Table 1: Industrial property market availability (million m²) as at June 2010

Availability (million m²)as at June 2010

Availability percentage changeon December 2009

Total New Large Total New LargeEngland & Wales 21.426 2.626 7.294 -0.8 -13.8 -2.7Scotland 2.365 0.068 0.766 1.8 -22.1 2.6Great Britain 23.791 2.694 8.060 -0.6 -14.0 -2.2North 1.438 0.162 0.408 0.7 -17.0 3.2North West 2.813 0.473 1.178 0.7 -5.2 4.8Yorkshire & Humberside 2.882 0.631 1.186 0.3 -9.5 3.7East Midlands 1.838 0.347 0.822 -8.6 -21.9 -20.8West Midlands 3.602 0.336 1.359 -3.5 -20.0 -7.5East Anglia 0.520 0.083 0.145 -1.0 -4.5 9.8South West 1.478 0.121 0.455 0.2 -10.5 4.3Wales 1.599 0.039 0.598 5.4 -16.4 -5.9South East 5.256 0.434 1.145 0.2 -16.7 1.8- Greater London 1.839 0.154 0.280 0.7 -14.5 3.5- Rest of South East 3.417 0.280 0.865 -0.1 -17.9 1.3

Premises below 500 m² excluded

Chart 5: GDP Growth, 1990 - Q2 2010

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Quarterly growth % Annual growth %

Source: ONS


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SOUTH EAST

LONDON

EASTANGLIA

EASTMIDLANDS

SOUTHWEST

WALES

WESTMIDLANDS

NORTHWEST

NORTH

YORKS &HUMBERSIDE

SCOTLAND

*The King Sturge data in this report are based on the Standard Statistical Regions as shown above. IPD investment performance data quoted in this report are based on Government Office Regions.

TOTAL GB

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Greater London 6

South East 7

East Anglia 8

South West 9

Wales 10

East Midlands 11

West Midlands 12

North West 13

Yorkshire & Humberside 14

North 15

Scotland 16


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Greater London

Change in availability - Over 6 and 12 months

Within Greater London, total available floorspace increased by 0.7% (13,185m²) in the six months to the end of June, to reach a total of 1.839 million m² at the middle of the year.

The availability of large buildings over 10,000m² increased by 3.5% (9,404m²) in the same period, to 279,801m² at the end of June. Large buildings accounted for 15.2% of Greater London’s available stock.

Available new floorspace decreased by 14.5% (26,147m²) in the first half of 2010 to 153,987m². This is the lowest level of new floorspace since December 2006. At the end of June, new floorspace accounted for 8.4% of Greater London’s available stock.

Over the 12 months to June 2010, available floorspace in Greater London increased by 3.4% (60,843m²).

The availability of large buildings over 10,000m² decreased by 1.8% (5,262m²) over the year to June.

Available new floorspace decreased by 24.9% (51,179m²) between June 2009 and June 2010.

Greater London availability - last 10 years

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Speculative development

The level of speculative development under construction within Greater London has been on a steep downward trend since mid 2007, with no schemes under construction speculatively at the beginning of the year. At the end of July however, there was an increase in development, with one small scheme of 2,787m² under construction, and there are a number of proposals in the pipeline which are expected to start early next year.

Greater London speculative floorspace under construction

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Prime industrial rents (£/m²)

Location Jan 10 July 10Heathrow 140.00 140.00

Park Royal 121.10 121.10

Stratford 94.20 94.20

Bromley-by-Bow 94.20 94.20

Croydon 88.80 88.80

Assumes minimum of 1,000m².

Investment market performance

The industrial market in Greater London produced a total return of 8.0% over the first half of 2010, according to the IPD Quarterly Index and 26.4% in the year to June; the strongest returns recorded across all GB regions.

Capital values increased by 4.7% in the first half of the year and were 18.3% higher over the 12 months to June.

According to the IPD Index, rental values fell by 0.1% over the first half of 2010; the smallest rental decrease across all GB regions, with a fall of 0.6% recorded over the year to June.

We believe that prime yields in Greater London have remained stable for multi-let properties over the past six months, whilst distribution yields have softened. At June yields were between 6 and 6¼% for multi-let estates and 6¼ to 6½% for large distribution properties.

Greater London market performance indicators Jun 05 - Jun 10

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Greater London agency comment

“Enquiry levels are still continuing to increase steadily with clear evidence that with the gradual take-up of the better quality buildings two factors are arising. Firstly, whilst tenants are still able to command significant incentive packages in exchange for sensible lease terms, in certain areas, where supply is becoming limited, landlords are now clearly starting to rein in those incentives and this will continue during the remainder of 2010 on a larger scale. Secondly the level of speculative development will begin to rise with a number of modest schemes close to starting, stimulated by increasing occupancy levels and continuing demand. The market has some way to go but there are some positive signs of improving occupier confidence in the Greater London industrial markets.”

Andy Harding, Partner (London) 020 7087 5310, [email protected]

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The South East

Change in availability - Over 6 and 12 monthsIn the South East, outside of London, total available floorspace decreased for the first time in two years, by 0.1% (3,075m²) over the first half of 2010. At the end of June there was a total of 3.417 million m² available.

Floorspace in large buildings of over 10,000m² increased by 1.3% (11,371m²) to 865,128m², representing 25.3% of the region’s total available stock.

Available new floorspace decreased by 17.9% (60,960m²) in the six months to the end of June, with new space accounting for 8.2% of the region’s total available stock.

Over the year to June 2010, available floorspace in the South East increased by 0.5% (16,732m²), which is the smallest annual increase across all regions.

Availability in large buildings over 10,000m² increased by 7.7% (61,969m²) over the 12-month period.

New floorspace availability decreased by 25.2% (94,670m²) over the 12 months to the end of June 2010.

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Speculative developmentThe level of industrial floorspace under construction on a speculative basis within the South East has increased by 12% since our previous survey. At the end of July 2010 there was a total of 14,835m² under construction across six schemes, the largest of which comprises 4,170m² and is due for completion in September. There are a number of schemes where construction has been put on hold, but as new supply becomes increasingly limited in the region, construction is expected to recommence on the majority of these schemes towards the end of the year.

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Location Jan 10 July 10Slough 121.10 121.10

Basildon 75.35 75.35

West Thurrock 75.35 - 80.70 75.35 - 80.70

Dartford 80.70 - 83.40 80.70 - 83.40

High Wycombe 91.50 91.50


Investment market performanceThe industrial market in the South East produced a total return of 6.8% in the first half of 2010, according to the IPD Quarterly Index, with an annual return of 20.0% for the year to June.

Capital values in the first half of the year increased by 2.9% with an annual increase of 11.1% over the 12 months to June.

According to the IPD Index, rental values fell by 1.4% in the first six months of the year and were 3.7% lower over the 12 months to June.

We believe that prime yields in the South East have remained stable for multi-let properties over the past six months, whilst distribution yields have softened. At June yields were between 6 and 6¼% for multi-let estates and 6¼ to 6½% for large distribution properties.

South East market performance indicators Jun 05 - Jun 10

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South East agency comment

“Industrial occupier demand within the South East improved further over the first half of 2010, with a steadily increasing level of enquiries and transactions within both large and smaller units. New floorspace continues to decline causing a shortage of good quality product, and occupiers are now experiencing a severe lack of this space particularly in the core industrial areas. With limited new speculative development underway, there is now more design and build activity and pre-let development will continue to increase.”

Tim Johnson, Head of International Industrial Agency020 7087 5300, [email protected]


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East Anglia


Following a significant increase in availability in our last survey, supply in East Anglia decreased by 1.0% (5,308m²) over the first half of 2010, to reach a total of 519,590m² at the end of June.

However, availability in large buildings increased by 9.8% (12,908m²) over the six months, to 144,643m². At the end of June, large buildings accounted for 27.8% of the region’s available stock.

Available new floorspace decreased by 4.5% (3,966m²) over the same period, to 83,318m², and accounted for 16.0% of East Anglia’s total supply at mid year 2010.

Over the year to June 2010, available floorspace within East Anglia increased by 9.9% (46,973m²).

Availability in large buildings over 10,000m² decreased by 5.3% (8,019m²) over the 12-month period. New available floorspace decreased by 17.0% (17,018m²) over the 12 months to June 2010.

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Speculative development under construction within East Anglia increased from a very low base, by 74% in the six months since our previous survey. At the end of July 2010 there was a total of 8,391m² being developed across three multi-unit estates, the largest of which comprises 4,837m² and is due for completion at the end of the year.

East Anglia speculative floorspace under construction

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Location Jan 10 July 10Peterborough 53.82 53.82

Huntingdon 53.82 53.82

Norwich 51.13 51.13

Ipswich 51.13 51.13



The industrial market in the Eastern region produced a total return of 7.2% in the first half of 2010, according to the IPD Quarterly Index and 21.4% in the year to June.

Capital values in the first half of the year increased by 3.5% with an annual increase of 12.8% for the year to June.

According to the IPD Index, rental values decreased by 0.7% in the first half of the year and were 2.2% lower than the same time a year ago.

We believe that prime yields in East Anglia have hardened to around 7% for multi-let estates, but softened to 7.25% for large distribution properties.

East Anglia market performance indicators Jun 05 - Jun 10

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East Anglia/South East contact

Tim Johnson, Head of International Industrial Agency020 7087 5300, [email protected]

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South West


Within the South West, available floorspace increased by 0.2% (3,656m²) during the first half of 2010, to reach a total of 1.478 million m².

Availability in large buildings over 10,000m² increased by 4.3% (18,632m²) in the six months, to 455,039m². At June 2010 this category accounted for 30.8% of the South West’s total supply.

Available new floorspace decreased by 10.5% (14.082m²) since our last survey to 120,567m² at June 2010. New floorspace provided 8.2% of the region’s total available stock.

Over the 12 months to June, available floorspace in the South West increased by 6.1% (84,690m²).

Available floorspace in large buildings of over 10,000m² increased by 13.6% (54,425m²) in the same period.

New available floorspace fell by 19.2% (28,539m²) in the 12 months to the end of June 2010.

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The level of speculative development under construction within the South West has increased by 59% over the past six months. At the end of July 2010, there was 15,031m² under construction across seven schemes, which represents an increase of 5,622m² since January and 15% of the total speculative development for GB.

South West speculative floorspace under construction

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Location Jan 10 July 10Bristol 78.00 78.00

Exeter 70.00 70.00

Plymouth 56.50 56.50

Swindon 59.20 59.20



The industrial market in the South West produced a total return of 7.6% in the first half of 2010, according to the IPD Quarterly Index and 22.8% in the year to June.

Capital values in the first half of 2010 increased by 3.7% with an annual increase of 13.6% for the year to June.

According to the IPD Index, rental values fell by 0.7% in the first six months of the year and were 2.2% lower over the 12 months to June.

We believe that prime yields in the South West have remained stable for multi-let estates, between 7½ - 7¾%, but for distribution properties yields have softened by 25bp to 6¾% at the end of June.

South West market performance indicators Jun 05 - Jun 10

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Total return

Capital growth

Rental value growth

Source: IPD

South West agency comment

“Clearly the occupier market remains subdued, but there is still a good undercurrent of activity throughout the region, particularly in the larger size range. There are still good deals available for tenants but covenant strength is playing an increasing role in the deals that can be done with landlords being far more cautious in their need to reduce void. The freehold market is slowly returning but this is partly driven by the complete lack of stock in this sector. The continued manufacturing outfall in some areas is resulting in larger industrial premises coming to the market at attractive pricing levels, providing good opportunities for owner occupiers. Good quality stock is proving attractive although this is partly because speculative development remains very constrained.”

Paul Baker, Partner (Bristol)0117 930 5780, [email protected] Western, Partner (Exeter) 01392 429305, [email protected]


10

Wales


Available floorspace in Wales increased by 5.4% (81,211m²) in the first half of the year, to 1.599 million m² at the end of June, the largest six-monthly increase across all GB regions.

The availability of large buildings over 10,000m² decreased by 5.9% (37,173m²) to 597,585m² at June 2010 to represent 37.4% of Wales’ total available stock.

New floorspace availability decreased by 16.4% (7,837m²) to a total of 39,803m². At June 2010, new floorspace represented 2.5% of the region’s total available stock, the lowest percentage share of any GB region.

Over the 12 months to June 2010, total available floorspace in Wales increased by 8.4% (123,394m²).

Available floorspace in large buildings increased by 7.8% (43,173m²) in the 12 months to June 2010.

The availability of new floorspace decreased by 31.4% (18,222m²) over this 12-month period.

Wales availability - last 10 years

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The level of speculative development under construction within Wales has been on a declining trend since July 2007, and this continued through the first half of 2010. Wales recorded a 66% decrease in the amount of floorspace under construction since January, with three small unit schemes totalling 2,198m² being developed at the end of July. The largest scheme comprises 1,394m² and all developments are due to reach practical completion by October.

Wales speculative floorspace under construction

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Location Jan 10 July 10Cardiff 55.00 53.80

Newport 48.40 48.40

Swansea 45.75 45.75

Wrexham/Deeside 48.40 45.75



The industrial market in Wales produced a total return of 5.7% in the first half of 2010, according to the IPD Quarterly Index and 13.1% in the 12 months to June.

Capital values in the first half of the year increased by 2.1%, with an annual increase of 5.1% for the year to June.

According to the IPD Index, rental values decreased by 0.1% in the first half of the year and were 2.4% lower over the 12 months to mid year.

We believe prime yields in Wales have hardened to 8¼% for multi-let estates and remained stable at 7% for large distribution properties.

Wales market performance indicators Jun 05 - Jun 10

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Source: IPD

Wales agency comment

“The M4 corridor remains the area of strongest demand with only a small decrease in rental values to date, albeit, masked to a certain extent by the increase in tenant incentives. Within the Valleys, capital values have dropped markedly however this price shift has sparked new occupier demand, particularly in the lower and mid Valleys region. Speculative development has slowed dramatically.”

Chris Sutton, Joint Managing Partner (Cardiff Office) 02920 726014, [email protected]

11

East Midlands


The amount of available floorspace in the East Midlands decreased by 8.6% (173,390m²) in the first half of 2010, to reach a total of 1.838 million m² at the end of the year. This was the largest percentage fall in supply across all GB regions.

Available floorspace in large buildings over 10,000m² fell by 20.8% (215,667m²) over the period, to 821,645m². Large buildings accounted for 44.7% of the total stock available at June 2010; the largest proportion recorded across all regions.

New supply contracted by 21.9% (97,205m²) in the first half of the year to reach 346,778m². At June 2010, new floorspace accounted for 18.9% of the region’s total supply.

Over the 12 months to June 2010, the level of available floorspace in the East Midlands decreased by 3.9% (73,909m²).

Availability in large buildings of more than 10,000m² decreased by 20.1% (206,107m²) over the same period.

New available floorspace decreased by 30.5% (152,178m²) between June 2009 and June 2010.

East Midlands availability - last 10 years

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The level of speculative development under construction within the East Midlands increased by 6% during the first six months of the year, with a total of 10,916m² in four schemes under construction at the end of July. This represents an increase of 652m² since January, with the largest scheme comprising 8,733m² and due for completion in November.

East Midlands speculative floorspace under construction

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Location Jan 10 July 10Northampton 59.20 59.20

Leicester 59.20 59.20

Derby 56.50 56.50

Nottingham 61.90 61.90



The East Midlands industrial market produced a total return of 6.3% in the first half of 2010, according to the IPD Quarterly Index, and 18.2% in the 12 months to the end of June.

Capital values in the first six months of the year increased by 2.4% with an annual increase of 9.6% for the year to June.

According to the IPD Index, rental values decreased by 1.0% in the first half of 2010 and were 3.0% lower over the 12 months to the end of June.

We believe that prime yields in the East Midlands have remained stable at 7½% for multi-let estates, but moved out by 25bp to 6½% for large distribution properties.

East Midlands market performance indicators Jun 05 - Jun 10

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Source: IPD

East Midlands agency comment

“Market conditions remain difficult but are showing improvement on the previous year. Overall the level of enquiries remain low, however a reduced supply of good quality accommodation is now beginning to match the levels of demand. Occupiers are taking advantage of the deals available in the market, whether through discounted pricing or substantial incentives packages. The limited availability of funding is impacting on freehold take-up, with some businesses unable to move despite the desire to, and reluctant to commit the levels of equity needed to satisfy the banks’ loan to value ratios. Much of the new build stock is gradually being taken-up and with limited speculative development we are continuing to see more design and build deals completing, signifying greater levels of occupier confidence. Poor quality stock in secondary locations continues to struggle compared to modern space along the M1 corridor or major industrial estates around the East Midlands’ cities.”

Matthew Smith, Partner (Nottingham) 01159 082123, [email protected]


12

West Midlands


In the first six months of the year, availability in the West Midlands decreased by 3.5% (130,113m²) to 3.602 million m² at the end of June 2010.

Floorspace available in large buildings over 10,000m² decreased by 7.5% (110,933m²) over the first half of the year. At June 2010 there was 1.359 million m² available, representing 37.7% of the region’s total available stock.

The amount of available new floorspace decreased by 20.0% (83,973m²) to 335,693m², equating to 9.3% of the region’s overall total supply at June 2010. Over the year to June 2010, available floorspace in the West Midlands decreased by 1.0% (36,996m²). Floorspace available in large buildings over 10,000m² decreased by 10.4% (157,103m²) during the same period. New available floorspace decreased by 23.8% (104,612m²) over the 12 months to the end of June.

West Midlands availability - last 10 years

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The level of speculative development under construction within the West Midlands has decreased by 69% in floorspace terms since our previous survey. At the end of July 2010 there was a total of 3,704m² under construction across six small unit schemes, representing a decrease of 8,220m² since January.

West Midlands speculative floorspace under construction

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Location Jan 10 July 10Birmingham 61.90 61.90

Black Country 53.80 53.80

Solihull 67.30 67.30

Assumes minimum of 1,000 m².


The industrial market in the West Midlands produced a total return of 7.1% in the first half of 2010, according to the IPD Quarterly Index, and 19.7% over the year to the end of June.

Capital values increased by 3.1% in the first six months of the year, with an annual rate of 10.5% over the year to June.

According to the IPD Index, rental values decreased by 2.0% in the first half of 2010 and were 5.1% lower, over the 12 months to June.

We believe prime yields in the West Midlands have remained stable at 7½% for multi-let estates, but moved out by 25bp to 6½% for large distribution properties.

West Midlands market performance indicators Jun 05 - Jun 10

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Source: IPD

West Midlands agency comment

“The tentative signs of improvement in the West Midlands market demonstrated during the second half of 2009 have gained momentum in 2010. The underlying trend is one of steady and gradual recovery, although there have been spikes of activity where occupiers have either released requirements which have been on hold through the recession, or continue to take advantage of distressed landlords/developers. The West Midlands market has not been the focus for several of the major build to suit distribution requirements recently, primarily due to the lack of large sites which can accommodate National Distribution Centres in excess of 50,000m². However, the existing stock of new/grey space is diminishing by virtue of the demand for Regional Distribution Centres which are smaller with requirements typically more footloose. The secondhand market is perhaps 6–12 months behind the new market. There are positive signs of a recovery but competition between landlords is fierce, and rents and incentive packages continue to drive deals.”

Carl Durrant, Partner (Birmingham)0121 214 9950, [email protected]

13

North West


Total availability in the North West continued to rise modestly, in the first half of the year, increasing by 0.7% (19,374m²) to reach a total of 2.814 million m² at the end of June. Floorspace available in large buildings over 10,000m² increased by 4.8% (53,673m²) to 1.178 million m² in the six months to June 2010. Large buildings accounted for 41.9% of the region’s total supply.

Available new floorspace decreased further, falling by 5.2% (26,191m²) to 472,715m². At the end of June 2010, new floorspace accounted for 16.8% of the region’s total available stock.

Over the year to June 2010, the total level of floorspace available in the North West increased by 1.7% (46,605m²).

Floorspace in large buildings over 10,000 m² increased by 7.5% (82,246m²) over this 12-month period.

The amount of new floorspace decreased over the 12 months, contracting by 17.3% (98,978m²) since June 2009.

North West availability - last 10 years

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At the end of July 2010, the level of speculative floorspace under construction within the North West had risen to 16,920m² in eight schemes. This represents an increase of 20% (2,895m²) since January and the region now accounts for the largest share of development across all GB regions with 17% of the total.

North West speculative floorspace under construction

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Location Jan 10 July 10South Manchester 64.60 61.90

Trafford Park 67.30 64.60

Warrington 64.60 61.90

Liverpool 51.10 51.10



The industrial market in the North West produced a total return of 6.2% in the first half of 2010, according to the IPD Quarterly Index, and 16.1% in the 12 months to the end of June.

Capital values in the first half of the year increased by 2.3% with an annual rate of 7.7% over the year to June.

According to the IPD Index, rental values decreased by 1.5% in the first six months of 2010 and were 3.5% lower over the 12 months to June.

We believe that prime yields in the North West have remained stable at around 7% for multi-let estates and 6¾ to 7% for large distribution properties.

North West market performance indicators Jun 05 - Jun 10

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Source: IPD

North West agency comment

“There has been renewed activity in the highbay warehouse sector above 25,000m² in the North West over recent months with ongoing positive interest in many of the remaining speculatively built units of a similar size. This is a result of occupiers taking advantage of strong negotiating positions and being opportunistic on both a freehold and leasehold basis in order to cover existing and future requirements. There is now a shortage of supply in some size ranges, and consequently, interest in design and build solutions has increased. Across other sizebands, enquiry levels have been sporadic although there is recent evidence of an upturn in activity. Rental levels are still under downward pressure in locations where there is high supply, but in prime areas such as Trafford Park, Warrington and North Manchester, where rents have generally held up, tenant incentives have now begun to stabilise. The freehold market for units up to 3,500m² remains difficult, with potential purchasers hamstrung by the lack of available finance.”

David Brooks, Head of UK & Industrial Logistics Group (Manchester) 0161 238 6239, [email protected]


14

Yorkshire & Humberside


In the first half of the year, available floorspace in Yorkshire and Humberside increased by 0.3% (8,924m²) to reach 2.882 million m² at the end of June 2010.

Available floorspace in large buildings over 10,000m² increased by 3.7% (41,889m²) in the same period, to 1.186 million m². Large units provide 41.2% of the region’s total supply.

Availability in new buildings decreased by 9.5% (66,336m²) in the first half of the year to 631,305m². New floorspace accounts for 21.9% of the region’s total supply, the largest percentage share across all GB regions.

Over the 12 months to June 2010, total available floorspace for Yorkshire and Humberside increased by 2.4% (67,799m²).

Availability in large buildings increased by 8.9% (96,738m²) from June 2009 to June 2010.

Available new floorspace decreased by 12.0% (86,202m²) over the 12-month period.

Yorkshire & Humberside availability - last 10 years

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The level of speculative development under construction in Yorkshire and Humberside has fallen since our last survey and the region now represents only 4% of all development across GB. At the end of July 2010 there was 3,746m² under construction within four schemes, a decrease of 28% on levels recorded in January. The largest development comprises 2,388m² and is due for completion at the end of the year.

Yorkshire & Humberside speculative floorspace under construction

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Location Jan 10 July 10Leeds 61.90 61.90

Doncaster 53.80 53.80

Hull 53.80 53.80

Wakefield 59.20 59.20



The industrial market in Yorkshire and Humberside produced a total return of 6.1% in the first half of 2010, according to the IPD Quarterly Index, and 14.2% in the 12 months to the end of June.

Capital values in the first half of the year increased by 2.5% with an annual rate of 6.5% over the year to June.

According to the IPD Index, rental values fell by 1.9% in the first half of the year and by 5.0% over the 12 months to June.

We believe that prime yields in Yorkshire and Humberside have hardened to between 7½ and 8% for multi-let estates and remained stable at 6¾ to 7% for large distribution properties.

Yorkshire & Humberside market performance indicators Jun 05 - Jun 10

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Source: IPD

Yorkshire & Humberside agency comment

“Occupier activity has increased since the beginning of the year, resulting in a number of recent deals, particularly on the larger available units. Landlords are keen to fill voids and are prepared to offer significant incentive packages or negotiate short-term deals until the market improves. Despite this, there remains a substantial supply of big sheds in the 12,000m² to 33,000m² range in the South Yorkshire region. Development of any kind is rare and with very little speculative development we are likely to see a shortage of quality stock under 10,000m² in the near future.”

Daniel Martin, Partner (Leeds)01132 355222, [email protected] Harris, Partner (Leeds)01132 355249, [email protected]

15

North


Following a decrease in total availability in our last survey, availability in the North increased by 0.7% (9,722m²) in the first half of 2010, to reach 1.438 million m² at the end of June 2010.

Floorspace available in large buildings over 10,000m² increased by 3.2% (12,508m²) in the first six months of the year. At June 2010 there was 407,519m² available, representing 28.3% of the region’s total supply.

Available new floorspace fell by 17.0% (33,192m²) to 161,648m². At the end of June 2010 new floorspace accounted for 11.2% of the region’s total available stock.

Over the year to June 2010, available floorspace in the North increased by 0.5% (7,434m²).

Floorspace available in large buildings over 10,000m² decreased by 4.2% (17,832m²) during this period.

Available new floorspace fell by 22.7% (47,486m²) over the 12 months to June 2010.

North availability - last 10 years

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The level of speculative development under construction in the North increased in the first half of 2010, following very subdued development over the past 18 months. At the end of July there was a total of 3,240m² under construction within the second phase of one scheme, comprising six units due for completion at the end of the year.

North speculative floorspace under construction

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Location Jan 10 July 10Newcastle 51.10 - 53.80 51.10 - 53.80

Team Valley 51.10 - 53.80 51.10 - 53.80

Stockton-on-Tees 37.70 - 43.05 37.70 - 43.05

Washington 48.45 48.45

Sunderland 43.05 43.05



The industrial market in the North produced a total return of 5.9% in the first half of 2010, according to the IPD Quarterly Index, and 13.7% in the 12 months to the end of June.

Capital values increased by 2.3% in the first half of the year, with an annual rate of 6.2%.

According to the IPD Index, rental values fell by 2.1% in the six months to June and by 3.0% over the full year.

We believe that prime yields in the North have hardened to around 7¾% for multi-let estates but have remained stable at 7% for large distribution properties.

North market performance indicators Jun 05 - Jun 10

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Source: IPD

North agency comment

“In general enquiry levels have remained consistent since the start of the year and signs suggest this trend will continue. A number of companies have taken advantage of the favourable terms which currently can be negotiated, and a number of large transactions have subsequently been completed so far this year. However, this trend may change as the stock of good quality available units diminishes leading to a hardening in the terms on offer. The market still remains difficult within the secondhand sector, with a number of potential occupiers having to go through lengthy approval processes before being able to commit, which is slowing the market down.”

Simon Hill, Partner (Newcastle) 0191 279 0006, [email protected]


16

Scotland


Total available industrial floorspace in Scotland increased by 1.8% (41,556m²) in the six months since our last survey, to 2.365 million m² at the end of June 2010.

In the first half of the year, available floorspace in large buildings over 10,000m² increased by 2.6% (19,136m²). Large units account for 32.4% of Scotland’s overall supply, with 765,665m² available.

The availability of new floorspace in Scotland fell by 22.1% (19,336m²) since our last survey. At June 2010 there was 68,080m² of new supply, providing 2.9% of Scotland’s total available stock.

In the 12 months to June 2010, Scotland’s total available floorspace increased by 6.2% (138,795m²).

Floorspace in large buildings over 10,000m² increased by 14.4% (96,437m²) in the same 12-month period.

Available new floorspace declined by 27.1% (25,323m²) over the 12 months to the end of June 2010.

Scotland availability - last 10 years

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The level of speculative development in Scotland has increased since our previous survey, as a result of a large unit scheme commencing construction in Glasgow. At the end of July 2010 there was 14,731m² under construction in one scheme, which comprises two units of 8,520m² and 6,211m² respectively. This represents an increase of 9,157m² since January and Scotland now accounts for 15% of all GB development.

Scotland speculative floorspace under construction

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Prime industrial rents, (£/m²)

Location Jan 10 July 10

Edinburgh (South Gyle) 75.35 75.35

Rest of Edinburgh 67.30 67.30

Glasgow 64.60 64.60

Glasgow Airport 64.60 64.60

Aberdeen 75.35 75.35



The industrial market in Scotland produced a total return of 6.2% in the first half of 2010, according to the IPD Quarterly Index, and 17.2% in the 12 months to the end of June.

Capital values in the first half of the year increased by 2.5%, with an annual rate of 8.0% to the end of June 2010.

According to the IPD Index, rental values fell by 0.9% in the first half of the year and were 0.3% lower over the year to June.

We believe that prime yields in Scotland are around 7½% for multi-let estates and between 6¾ to 7% for large distribution properties.

Scotland market performance indicators Jun 05 - Jun 10

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Source: IPD

Scotland agency comment

“Enquiries have remained at a steady pace but occupiers are still in the driving seat in most areas when it comes to negotiating terms. Demand in Edinburgh is predominantly for the smaller size range of units from 300 to 500m² with evidence of some higher rents being achieved for trade counter units in key locations with main road frontage. Secondary areas with large amounts of supply continue to struggle with headline rents potentially still decreasing, or with incentives being more inventive to try to attract tenants.”

Kirsty Palmer, Partner (Edinburgh) 0131 243 2222, [email protected]

GB

DISTRIBUTION

MARKET

New units of 10,000m2 and over


18

Occupier Demand

The national picture

During the recent recession, occupier take-up for new units over 10,000m² slumped to a 15-year low in terms of floorspace transacted, but since the weakest period of demand during the first half of 2009, take-up levels have shown steady improvement.

In the first six months of 2010, a total of 452,567m² was taken-up in 13 new units of 10,000m² and over. This is a similar level to the take-up recorded in the second half of 2009 (491,345m²), but compares with only 132,503m² in the same period last year. In addition, there are a further five transactions totalling over 100,000m² that have taken place during the third quarter of the year so far, together with a number of significant requirements, that will continue to push take-up higher.

During the first half of the year, two thirds (65%) of all new floorspace taken-up was speculatively developed space, with the design and build market accounting for 35%. This is a reversal of historical trends whereby speculative floorspace has generally accounted for only one third of transactions. The increase in speculative take-up is a result of occupiers generally benefiting from a good choice of speculatively developed product, available on competitive terms. However, as speculative supply becomes limited in certain locations, companies requiring new facilities will need to seek design and build solutions, or potentially good quality, modern secondhand space.

Take-up of new logistics facilities of 10,000m2 and over in GB

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2010

H1

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

mill

ion

m2

Tran

sact

ion

s

Floorspace (m2) No of occupier transactions

0

10

20

30

40

50

60

70

80

90


Regions

Regionally, London, the South East and Eastern combined accounted for the largest share of floorspace taken-up in the first half of 2010 at 28% of the total. The regions’ share was boosted by two large design and build transactions by retailers in Dagenham and Andover respectively.

Regional take-up of new logistics facilities of 10,000m2 and over in GB

2010

North West

West Midlands

London, South East/Eastern

South West & Wales

Scotland

East Midlands

Yorks & Humberside

North

28.1%

16.4%

25.2%

19.4%

0%0%0% 0%

10.9%

2009

37.8%

18.0%

9.5%

7.5%

6.1%

15.2%

0%

5.9%


The East and West Midlands accounted for the next largest share of take-up at 25% and 21% of the total respectively, whilst the North West, North East and Scotland did not record any transactions in new units over 10,000m² in the six month period.

Sectors

Take up in the distribution market for the first half of the year was dominated by retailers, with many taking advantage of competitive deals, resulting in the sector accounting for 70% of all transactions. Non-food retailers took the largest share with a number of well known names and online retailers starting to implement supply chain requirements which had previously been put on hold.

Logistics firms were less prevalent in the market during the first half the year, with only two transactions for the sector recorded, although this could be an indication of retailers managing their supply chain networks in-house.

Online and grocery retailers will continue to drive the occupier recovery, with some very large active requirements in the market.

Take-up of new logistics facilities of 10,000m2 and over by sector

0

10

20

30

40

50

60

70

80

90

100

2010 H120092008200720062005

Food retail Non-food retail Logistics

Manufacturing Other


Size analysis

In the first half of 2010, the average size of unit taken-up (in new units of 10,000m² and over) was 34,812m². This represents a marked increase in the average unit size recorded in previous years (23,105m² for 2009 and 27,728m² for 2008) and signifies a return of confidence for occupiers in taking larger units. Over the period 2000-2009 the average size of units taken-up was 26,325m².

Average size of unit taken-up in new logistics facilities of 10,000m2 and over

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2010 H1200920082007200620052004200320022001

Trend line

m2


19

Supply


At the end of June 2010, available new speculative supply across GB stood at 1.598 million m² in 76 units of 10,000m² and over. New supply therefore fell by a further 288,190m² during the first half of 2010 and the level at mid 2010 compares with 1.886 million m² at the end of 2009, and 2.294 million m² at the end of 2008. The supply of large new distribution facilities is now 39% lower than its peak in March 2008 (2.621 million m²).

The supply of new distribution space varies considerably by region, highlighting a North-South divide. Yorkshire & Humberside and the North West account for large shares of current supply, and with demand remaining patchy in these areas, there is still a window of opportunity for occupiers to secure soft deals. In the wider South Eastern (London, South East and Eastern) and South West markets, however, the supply of new or good quality distribution units is rapidly diminishing. In these locations, occupiers are less likely to be able to negotiate bargains and will be forced to consider design and build solutions or modern, secondhand stock to satisfy their requirements.

Speculative development in the logistics market came to a standstill at the middle of 2009 and no new development has started nationally since then. There are currently no new buildings of 10,000m² or over under construction speculatively across GB and whilst the occupier market remains fragile, development is unlikely to start before 2011. However, some developers and funds have started the first strategic site acquisitions since before the recession, and if the gradual improvement in demand continues, speculative development could be considered for selective locations next year.

Rents

Prime headline rents have remained stable, although these are largely propped up by generous incentive packages. In most areas, the market is still more favourable to tenants, with occupiers taking advantage of very competitive deals. Rent free periods of up to 12 months are being offered for five year terms, whilst stepped rentals and capital contributions to fit-outs are still common. However, in the areas of tight supply, these incentives are now tightening.

According to latest forecasts, distribution rental values are expected to see further downward adjustments this year and next, before returning to modest growth in 2012. The following table presents the general tone of prime headline rents for new logistics units across GB.

Prime logistics rents

Location £ per m²London (Heathrow) 140.00

London (East - Dagenham) 80.00

Bristol 61.90

Birmingham 59.20

Manchester 51.10

Leeds 51.10

Scotland - M8 corridor 48.40


Investment comment

Investor demand within the distribution sector, has cooled since the beginning of the year reflecting ongoing concerns with the wider economy and the occupier market remaining fragile. Whilst there is still a considerable weight of money available and relatively good demand from investors, they are generally more discerning and refocused on prime. The General Election and Budget caused investors to be even more cautious in their purchases and they placed greater focus on property fundamentals causing a narrowing in the definition of prime.

Recent transactions indicate that prime distribution yields for 15-year income have softened to around 6½%, compared with 6% in December.

According to the IPD Quarterly Index, the UK distribution market produced a total return of 7.4% in the first half of 2010, and 22.5% in the year to June.

Capital values in the first half of the year increased by 3.6% with an annual increase of 13.9% to the end of June 2010.

According to the IPD Quarterly Index, rental values fell by 1.1% in the first half of the year and were 2.9% lower over the full year.

INDUSTRIAL & DISTRIBUTION FLOORSPACE TODAY

www.kingsturge.com

IDFTContacts

Head of UK Industrial & Logistics Group (Manchester) David Brooks +44 (0)161 238 6239

Head of International Industrial Agency (London) Tim Johnson +44 (0)20 7087 5300

Head of Research Angus McIntosh +44 (0)20 7087 5500

Industrial Research Jon Sleeman +44 (0)20 7087 5515

Industrial Research Anna Behan +44 (0)20 7087 5516

Agency

London Andy Harding +44 (0)20 7087 5310

London Gus Haslam +44 (0)20 7087 5301

London Tim Clement +44 (0)20 7087 5303

Bath Huw M Thomas +44 (0)1225 32 4109

Birmingham Carl Durrant +44 (0)121 214 9950

Bristol Paul Baker +44 (0)117 930 5780

Cardiff Chris Sutton +44 (0)29 2072 6014

Edinburgh Kirsty Palmer +44 (0)131 243 2222

Exeter Tim Western +44 (0)1392 429 305

Glasgow David Cobban +44 (0)141 225 0516

Leeds Daniel Martin +44 (0)113 235 5222

Leeds Richard Harris +44 (0)113 235 5249

Manchester Steven Johnson +44 (0)161 238 6238

Newcastle Simon Hill +44 (0)191 279 0006

Nottingham Matthew Smith +44 (0)115 908 2123

Southampton Matthew Poplett +44 (0)23 8038 5621

All data contained in this report has been compiled by King Sturge LLP and is published for general information purposes only. While every effort has been made to ensure the accuracy of the data and other material contained in this report, King Sturge LLP does not accept any liability (whether in contract, tort or otherwise) to any person for any loss or damage suffered as a result of any errors or omissions. The information, opinions and forecasts set out in the report should not be relied upon to replace professional advice on specific matters, and no responsibility for loss occasioned to any person acting, or refraining from acting, as a result of any material in this publication can be accepted by King Sturge LLP.

© King Sturge LLP SEPTEMBER 2010

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