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PRIME LOGISTICS
International Property Consultants
The definitive guide to the UK’s distribution property marketQ1 2017 Bulletin
www.geraldeve.com
PRIME LOGISTICS The definitive guide to the UK’s distribution property market
10%
5% 15%
0% 20%
Q1
2017
2016
2014
2013
2012
2011
2010
2009
2015
TAKE-UP FALLS 23% ON RECORD-BREAKING Q4
Take-up in Q1 2017 fell to 10.7 million sq ft, down 23% on Q4 2016. Such a drop was to be expected given that Q4 2016 was the largest single quarter on record for occupier take-up and the first quarter of the year is typically one of the less active. Whilst the Q1 2017 volume is the same as the five year average quarterly figure, the composition of demand was notably different.
Retailers and wholesalers, usually the most active occupier sector, were not as acquisitive as usual during Q1 and only accounted for 15% of quarterly activity. Notable by its absence was Amazon, with retail and wholesale sector demand driven by discount retailers such as Lidl and Aldi.
It was the manufacturing sector which was the most dominant occupier sector, accounting for 36% of all Q1 activity. The letting by Jaguar Land Rover of the 555,000 sq ft Tyrefort Dunlop warehouse in Minworth was the largest transaction in the manufacturing sector although Molson Coors Brewing also completed a sale and leaseback of their 485,000 sq ft warehouse in Burton on Trent and Accrol Paper let the 370,000 sq ft M58 warehouse in Skelmersdale.
A SLOW START TO THE YEAR FOR PRE-LETTING ACTIVITY
Given the occupancy requirements of manufacturers, it was the take-up of secondhand and refurbished up-and-built product which drove activity during Q1. 52% of all space taken-up was secondhand, the highest proportion since Q4 2015, and the refurbishment activity of landlords undertaken during 2016 was vindicated given the swift letting of several refurbished buildings during Q1.
The average size of building transacted in Q1 also decreased to 144,440 sq ft from 170,868 sq ft, but remains in excess of the ten year average deal size of 137,398 sq ft, given the large scale development sales which were agreed in Q1 2017. These include Neovia Logistics 1.2 million sq ft warehouse in Desford in the Northern East Midlands and Lidl’s 624,000 sq ft unit at Eurocentral in the Scottish Central Belt, both of which received planning permission during the quarter.
The largest pre-let agreed during the quarter was Gardman’s pre-let of 414,000 sq ft at Prologis’s Apex Park in Daventry which will complete the third phase of the park.
AVAILABILITY FALLS TO LOWEST LEVEL ON RECORD
The strong level of take-up over the last few quarters, combined with activity on secondhand stock in Q1, has further taken its toll on the overall availability of logistics space in the UK. Even including the speculative space that is on the market or under construction, the overall volume of space fell to the lowest we have recorded since our records began in 2006, at a rate of 5.9%.
The slowdown in speculative development we have seen over the last few quarters is another reason for this decline. We still have not seen the return of secondhand space to the market which could be expected in times of strong pre-letting activity and whilst we have seen a handful of larger secondhand buildings come to the market, it has not been sufficient to meet demand.
There is a very limited choice of affordable space on the market and it is those occupiers who are in urgent need of accomodation that are feeling the brunt of this supply shortage. Based on five year average levels of demand there is currently just over 1 year’s supply of all qualities of space on the market, the lowest on record.
Quarterly take-up by occupier sectorSource: Gerald Eve
Q1 2017 take-up by event typeSource: Gerald Eve
Quarterly years of supply based on five year average take-upSource: Gerald Eve
Services Retail and Wholesale Other/unknown
Manufacturing Logistics
Q1
2012
Q3
2012
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2013
Q3
2013
Q1
2014
Q3
2014
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2015
Q3
2015
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2016
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2017
3.0
0
0.5
1.0
1.5
2.0
2.5
Years of supply
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2017
Q4
2016
Q3
2016
Q2
2016
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2016
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2015
14
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Million sq ft
20%Sale
9%Pre-let
25%Development
Sale
46%Letting
First Quarter 2017
Q1 2017 KEY INVESTMENT TRANSACTIONS
Property Purchaser Vendor Price (£m) Size (sq ft) Yield (%) Tenant
APP JV SEGRO Aviva Investors 365 3,767,369 3.60% 21 assets (87% at Heathrow Airport)
Portfolio Aviva Investors SEGRO 149 753,474 3.70% 4 London assets
Cara Portfolio Clearbell Capital Aviva Investors 31.75 1,159,962 8.50% 14 assets
Apex Portfolio (part) Legal & General UK PIF II Columbia Threadneedle 31.5 - 7.50% 3 Booker assets
Signia Park, Didcot Tritax Big Box REIT Clowes Developments UK 29.24 242,059 5.82% Hachette UK
Kiln Lane Ind Estate, Immingham WarbaBank (Kuwait) Oxenwood Real Estate 24.575 79,997 5.50% Kia Motors
Centrum West, Burton upon Trent UK CPT Goodman International 22.2 258,366 5.80% Palletforce
Crosspoint Business Park, Coventry F&C UK Property Fund Commercial Management 15 146,701 5.39% TNT UK Ltd
0 1 2 3 4 5 6 7 8 9 10
SPECULATIVE DEVELOPMENT SLOWDOWN CONTINUES
1 million sq ft of space started construction speculatively during Q1, a 37% reduction on Q4. This is a continuation in the slowdown we have seen post-EU referendum, as developers and funds continue to assess occupier interest in schemes already underway or wait for occupier commitment. The average size of speculative development start also fell from 153,988 sq ft to 80,945 sq ft in Q1, although this is more reflective of the location of the schemes which got underway, which were focused in London and the South East.
The amount of available speculatively developed space has shown incremental rises since Q4 2015 and there is now around 6.5 million sq ft of such space on the market. Whilst rising, we have seen over 15 million sq ft of speculative space completing development since 2015, much of which has been absorbed by occupiers. Void rates on such space remain low, at just over 4 months on the space that has let, and historically, particularly when compared to 2009, the amount of speculative space on the market is low. The total volume of development starts, including purpose-builds, only decreased by 3% in Q1.
2017 EXPECTED TO BE A WEAK YEAR FOR SPECULATIVE COMPLETIONS
At 6.2 million sq ft (accounted for by 31 buildings), the total volume of development completions in Q1 showed a 12% decrease on Q4 2016. The proportion of speculative space completing decreased from 31% of all completions to only 10%. Geographically, we saw more speculative space complete in London and the South East and recorded a weighting towards the West Midlands and Yorkshire markets for purpose-builds.
Despite some large completions from the likes of Aldi, Howdens and TK Maxx, the average size of building completing during the quarter decreased to 198,727 sq ft in Q1 2017, down from 211,223 sq ft in Q4.
Based on those units currently under construction, less than half the volume of speculative development completions are expected to complete in 2017 compared to 2016. Our forecasts show that all development completions will be down 26% and that speculative space will only account for 23% of the total. These figures could change given the short build period of warehouses.
INCREASED VOLUME OF CAPITAL TARGETING LOGISTICS
There continues to be a significant weight of money targeting prime logistics assets, both foreign and domestic, and pricing remains keen. We did see some deals transact at sharp yields however, by and large, prime yields were flat during Q1 2017, having recovered all lost ground since the EU referendum.
Investors remain compelled by the occupational fundamentals underpinning the sector and view the rental growth prospects as a good hedge against rising inflation. As a result we have seen a lot of positioning by some of the largest investors in the market to raise more funds. Tritax have secured a £90m loan and are undertaking a £200m share issue, PBB has provided a £147 milllion facility to Prologis UK Logistics Venture (a JV with CBREGI) and Blackstone has created a JV with Delin Capital.
Investors have also looked at rights issuance and listing options during the quarter. Logicor, owned by Blackstone, is seeking to either list on the UK Stock Exchange or sell directly, and SEGRO has announced a one for five fully underwritten rights issue to raise around £573 million. LondonMetric too has raised £95.5 million via a share placing. So limited is the supply of investment grade stock that investors are looking at more indirect ways to capitalise on the strength of the market.
The supply and demand imbalance continues to place upward pressure on rents. This is likely to be strongest in those locations where we have not to date seen a high level of speculative development. We are forecasting an average across all our regions of 2% growth in prime rents for the next five years, with those markets with oven-ready land and strong signals for speculative development where we expect rents to rise the most sharply.
Availability of speculatively built space Rolling four quarter speculative development
completions (RHS)
Quarterly availability and rolling four-quarter development completions of speculatively developed space Source: Gerald Eve
Annual development completions by type and 2017 forecastSource: Gerald Eve
Purpose-built Speculative
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2009
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30
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Million sq ft Million sq ft
2017(f)2016201520142013
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Million sq ft
Sources: Gerald Eve, Property Data
GERALD EVE IN THE MARKET Gerald Eve is well-established in the logistics property market and covers the full range of property services, from national occupational and investment agency through to lease consultancy and valuation. Our specialists have been involved in several high profile transactions during the quarter. Please contact them directly for more information.
John Rodgersadvised Goldman Sachs on its disposal of Boreham Interchange in Chelmsford, a distribution park anchored by Royal Mail.
Jason Printis marketing L175 in Liverpool International Business Park, on behalf of Peel Logistics, which is attracting occupier interest from automotive manufacturers given its proximity to Jaguar Land Rover’s Halewood site.
Gerald EveGerald Eve celebrated a double success at the 2017 Property Awards this quarter, walking away with the accolades for Investment Team of the Year and Professional Team of the Year.
Mobile +44 (0)7810 307 422 www.geraldeve.comMobile +44 (0)7833 170 680
Agency
MidlandsRichard LudlowTel. +44 (0)121 616 4802 [email protected]
Myles Wilcox-SmithTel. +44 (0)121 616 [email protected]
LondonMark TrowellTel. +44 (0)20 7333 6323 [email protected]
David MouleTel. +44 (0)20 7333 [email protected]
North WestJason PrintTel. +44 (0)161 830 [email protected]
South West & WalesRichard GatehouseTel. +44 (0)29 2038 1863 [email protected]
ScotlandSven MacaulayTel. +44 (0)141 227 2364 [email protected]
InvestmentJohn RodgersTel. +44 (0)20 3486 3467 [email protected]
Nick OgdenTel. +44 (0)20 3486 [email protected]
Lease ConsultancyJohn Upton-ProwseTel. +44 (0)20 7333 [email protected]
Ian GascoigneTel. +44 (0)121 616 4812 [email protected]
Chris LongTel. +44 (0)20 7333 [email protected]
RatingKeith NormanTel. +44 (0)20 7333 6346 [email protected]
ValuationRichard GlenwrightTel. +44 (0)20 7333 [email protected]
ResearchSteve SharmanTel. +44 (0)20 7333 [email protected]
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Prime Logistics is the definitive guide to the UK’s distribution property market. Dealing with logistics units of 50,000 sq ft and above, this research report gives detailed analysis and statistics for 26 key distribution areas – from take-up, stock and development statistics to drivers of occupier demand, growth forecasts and regional outlooks. All previous editions can be downloaded from our website.
Prime Logistics is a short summary and is not intended to be definitive advice. No responsibility can be accepted for loss or damage caused by any reliance on it.
The reproduction of the whole or part of this publication is strictly prohibited without permission from Gerald Eve LLP.
© Gerald Eve LLP 2017. All rights reserved.
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