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PRIME LOGISTICSThe definitive guide to the UK’sdistribution property market
Q1 2016 Bulletin
• 10.8 million sq ft of logistics space taken-up in Q1• Activity driven by deals on large units over 1 million sq ft• Largest immediately-available shed on the market let to L&G Homes• 'BREXIT' uncertainty has not yet slowed market activity• 1.8% average annual prime rental growth predicted to 2018• Largest volume of speculative development completions since Q3 2008• Institutions rein in exposure to speculative funding
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PRIME LOGISTICS The definitive guide to the UK’s distribution property market
MEGA SHEDS DRIVE Q1 TAKE-UP
Take-up during Q1 fell 4% to 10.8 million sq ft, which whilst a reduction, is still comfortably above the five-year quarterly average of 9.6 million sq ft.
It was the pre-letting activity of mega sheds which helped drive this strong quarterly figure and three deals over 1 million sq ft completed during Q1. The largest of the quarter was the purchase of 55 acres of land for a 1.2 million sq ft facility by The Range at Western Approach in Bristol. DHL also took a pre-let for 1.085 million sq ft at Magna Park Lutterworth and Amazon pre-let 1.053 million sq ft at Mountpark in Coalville. Over the last five years, very large sheds have accounted for an average 6% of take-up per quarter, however during Q1, they accounted for 36%. This pushed the average deal size to 168,272 sq ft, up from 103,478 sq ft in Q4 2015.
A number of corporate deals have been struck between food retailers in Q1, the basis of which was to enhance product offerings and adapt to changing shopping patterns. These agreements could have a knock-on effect on requirements for logistics space. The wholesale supply deal between Amazon and Morrisons for example could necessitate the need for additional logistics space, as could Sainsbury’s purchase of Home Retail Group / Argos.
HOUSE BUILDING SUPPORTS LOGISTICS
The letting of the refurbished and recently extended 550,000 sq ft ‘Big 555’ warehouse at Sherburn Distribution Park to L&G Homes in February was the largest transaction of existing standing stock since Amazon let the 995,000 sq ft ‘Bigfoot’ building in Daventry in Q3 2014.
L&G Homes intend to create the largest modular homes construction factory in the world at the building. Interestingly, when combined with take-up activity from companies in the house building supply chain, such as IG Doors and GAP UK, manufacturers of doors and windows, the increase in residential development is also benefitting the logistics market.
Regionally, it was locations in the Northern East Midlands which helped drive take-up in Q1, accounting for 30% of all occupier activity, up from 12% in Q4 2015. As well as Amazon and DHL, Ted Baker signed up to 323,900 sq ft at Raynesway Park in Derby and Boden pre-let 275,623 sq ft at Optimus Point, Leicester.
Demand for large, high quality and well located logistics facilities is high and retailers continue to position themselves to best adapt to the changing nature of consumer shopping patterns. If demand continues at this pace we could see 2016 take-up volumes approaching the record-breaking levels seen in 2015.
SPEC SPACE FILLS SUPPLY GAP
The letting of the ‘Big 555’ building has taken the largest available up-and-built warehouse off the market. The largest immediately-available building on the market is now the 420,000 sq ft combined Units 3 and 4 at the M58 Distribution Centre in Skelmersdale. There are other secondhand buildings of a similar size range – Max 380 in Scotland and DC380 in Harlow for instance, but nothing over 450,000 sq ft in size.
The largest new speculatively-built building on the market is the 336,800 sq ft ‘Angle 340’ unit at Andover Business Park. Whilst occupiers now have an increased quality of choice, large scale requirements continue to have to be satisfied by pre-lets or development sales. Indeed, almost half of all Q1 occupational activity was as a result of pre-lets or pre-sales.
Developers across the board have certainly responded to this shortage and have gone some way to fill the supply gap, which has been welcomed by occupiers given the speed with which we have seen several of the speculative developments let. Indeed, 19% of all speculative developments getting underway since 2013 have been let during construction. By region, the core markets in the West Midlands and in and around Manchester currently have the most space being built speculatively.
Q1 take-up by occupier sectorSource: Gerald Eve
Key occupational transactions, Q1 2016
Speculative developments under construction by regionSource: Gerald Eve
Quarterly take-up and five-year averageSource: Gerald Eve
Property Location Size (sq ft) Tenant Deal type Developer
Central Park Bristol 1,200,000 The Range Pre-let Stoford
Magna Park Lutterworth 1,085,476 DHL Pre-let IDI Gazeley
Mountpark Bardon Coalville 1,000,000 Amazon Pre-let Mountpark
The Big 555, Sherburn Distribution Park Sherburn 556,000 L&G Homes Letting (secondhand) Gladman
Angle 325, Derby Commercial Park Derby 323,895 No Ordinary Designer Label Ted Baker Letting (speculative) Goodman
Grange Park Northampton 304,000 Clipper Logistics John Lewis Letting (speculative) Goodman
Optimus Point Leicester 275,623 Boden Pre-let Wilson Bowden
Black Velvet, Hams Hall Birmingham 172,215 The Works Pre-let Canmoor
Quarterly take-up 5 year average
Source: Gerald Eve
Q4
2013
Q1
2014
Q2
2014
Q3
2014
Q4
2014
Q1
2015
Q3
2015
Q2
2015
Q1
2016
2
0
4
6
8
10
12
14
Q4
2015
Million sq ft
2.22.00 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8
Million sq ft
South East England
East Midlands
London
Northern England
West Midlands
Pre-lets/pre-sales accounted for 48% of Q1 take-up
(10% in Q4 2015)
11% Services
24%Logistics
8%Other
37% Retail
20%Manufacturing
Under construction speculatively at the end of Q1
Speculative Purpose-built
SPEC COMPLETIONS AT SEVEN YEAR HIGH
The total volume of development starts in Q1 fell by 47%, primarily because of a fall in purpose-built starts. The volume of speculative starts increased by 16% however, as several schemes in London and Greater Manchester got underway. Indeed, at 357,700 sq ft, one of the largest speculative schemes of the current cycle got underway at the Exeter Property Group/First Industrial ‘Logistics North’ scheme in Bolton.
A key finding of Q1 has been the high volumeof speculative development completions. 13 buildings totalling 2.3 million sq ft of space completed development during Q1, the largest volume of space completed speculatively for over 7 years.
Developers, including Goodman, IM Properties, Gazeley and db symmetry have all completed on schemes so far this year, with reportedly high levels of occupier interest in each. It has certainly been the case that the speculatively-developed space added to the market so far during this cycle has been taken-up quickly (the average period from completion to letting has been just over a month for space built since 2014), but as more elevated volumes of space are now being added, investors and developers are pausing to assess the depth of demand for such space.
PRICES STABILISE
Volumes traded in Q1 were down 51% on Q4. Such a drop is to be expected in the quarter following the year end (volumes in Q1 2015 showed an even larger quarterly fall of 68%), but some of this subdued activity could in part be explained by a combination of EU referendum uncertainty and a reduction in industrial allocations by institutions. This has not affected pricing however and prime yields remained flat across all our locations during Q1.
Even though domestic institutions are not under the same pressure to invest, there continues to be significant investor interest due to the increase in overseas buyers in Q1 who have kept pricing stable. The hiatus in activity by institutions, particularly in the speculative development market, does perhaps leave an opportunity for other investors to enter the forward-funding market, given the still-attractive market fundamentals.
Whilst we expect prime rental growth to remain positive, we also expect it to moderate. Looking forward, and implying ‘non-prime’ rental growth from the relationship between IPD and prime rents, suggests that this segment of the market is set to experience superior rental growth over the next few years. Prime rents have already enjoyed strong growth and the supply of secondhand stock is limited, so we could see improved levels of rental growth on ‘non-prime’ stock.
IN OR OUT?
As the market holds out for a decision on the outcome of the UK referendum, we could see a cautious pause in occupational and investment activity during Q2. This need not be detrimental to the market, as developers and investors could well use H1 2016 to reassess the appropriate supply response and could in time help to ensure a continuance of the favourable market conditions.
Whilst the odds are currently in favour of remaining within the EU (and we have used this assumption within our forecasts), a lot of the electorate remain undecided as to how they will vote. Such uncertainty will have an undoubted effect on property and financial markets, and whilst there is likely to be a slowdown in activity, we could also see investors hedge against the impact and make the most of a temporary drop in pricing. Life outside of the EU will require the renegotiation of trade agreements, which could have an impact on the (already-struggling) manufacturing sector, and, if the domestic economy stalls and interest rates rise, then this too could have consequences for consumer spending and the demand by retailers in particular for logistics space.
Whatever the outcome, the second half of 2016 looks set to be characterised by strong levels of occupier activity, and more speculative development completions. After all, the fundamental attractions of logistics have much more to do with the assets themselves than membership of the EU and heightened levels of investment transactions on prime stock.
We forecast that distribution warehouses will deliver one of the highest total returns of all asset classes to 2018, at an average 7.8% per year. The fundamentals of the sector remain conducive to further investment and we still see further growth in both prime and ‘non-prime’ rents to be had. Q2 has certainly started strongly with a private Korean investor buying the 1 million sq ft Amazon shed in Bardon for £120 million, one of the largest single logistics asset deals on record.
First Quarter 2016
Key investment transactions, Q1 2016
Rolling annual development completions by typeSource: Gerald Eve
Rental growth forecasts by qualitySource: Gerald Eve, IPD
Property Purchaser VendorPrice (£)
Size (sq ft)
Yield (%) Tenant
Project PhoenixCBREGI on behalf of Malaysia's Employees Provident Fund
IM Properties 200 2 million 5.25 18 assets
Barton Business Park, Burton-upon-Trent
Tritax DVS Property 74.7 653,670 5.55 Argos
The Vault, Liverpoool HansaInvest GmbH Deutsche Asset & Wealth 48.0 622,000 5.35 B&M Retail
Portbury Way, Bristol Tritax Undisclosed 25.2 250,763 5.15 Brakes
Hawleys Lane, Warrington Griffen UK Logistics Fund DTZ Investors 21.4 376,220 8.24 Eddie Stobart
Deykin Avenue, Birmingham Standard Life London Metric 18.2 209,993 5.20 WHSmith
Castlewood Business Park Aberdeen Clowes Development 17.9 219,454 5.47 Alloga
Park Royal CBREGI Leap New Company 10.8 44,019 4.76 Anthony Ward Thomas
Source: Gerald Eve, Property Data
Q4
2008
Q1
2009
Q2
2009
Q3
2009
Q4
2009
Q1
2010
Q2
2010
Q3
2010
Q4
2010
Q1
2011
Q2
2011
Q3
2011
Q4
2011
Q1
2012
Q2
2012
Q3
2012
Q4
2012
Q1
2013
Q2
2013
Q3
2013
Q4
2013
Q1
2014
Q2
2014
Q3
2014
Q4
2014
Q1
2015
Q2
2015
Q3
2015
Q4
2015
Q1
2016
10
6
2
8
4
0
12
14
Million sq ft
2005
2006
2007
2008
2009
2010
2012
2013
2014
2015
2016
2017
2018
4
0
-4
2
-2
-6
6
%
Forecast
IPD Distribution Warehouse rentail growth Gerald Eve average UK prime rent Implied non-prime rental growth
INDUSTRIAL & LOGISTICS CONTACTS
Agency
MidlandsRichard LudlowTel. +44 (0)121 616 4802 [email protected]
Myles Wilcox-SmithTel. +44 (0)121 616 4811 [email protected]
South West & Wales Richard GatehouseTel. +44 (0)29 2038 1863 [email protected]
North West Jason PrintTel. +44 (0)161 830 7095 [email protected]
London Mark TrowellTel. +44 (0)20 7333 6323 [email protected]
David Moule Tel. +44 (0)20 7333 6231 [email protected]
Scotland Sven MacaulayTel. +44 (0)141 227 2364 [email protected]
Investment
George UnderwoodTel. +44 (0)20 7333 6396 [email protected]
Lease consultancy
John Upton-ProwseTel. +44 (0)20 7333 6248 [email protected]
Rating
Keith NormanTel. +44 (0)20 7333 6346 [email protected]
Valuation
Richard GlenwrightTel. +44 (0)20 7333 6342 [email protected]
Research
Steve SharmanTel. +44 (0)20 7333 [email protected]
Sally BruerTel. +44 (0)20 7333 [email protected]
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 2016. All rights reserved.
London (West End) 72 Welbeck StreetLondon W1G 0AYTel. +44 (0)20 7493 3338
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BirminghamBank House8 Cherry StreetBirmingham B2 5ALTel. +44 (0)121 616 4800
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ManchesterNo1 Marsden Street Manchester M2 1HWTel. +44 (0)161 830 7070
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GERALD EVE’S UK OFFICE NETWORK
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.
George Underwoodadvised CBREGI on the £10 million sale and leaseback of Anthony Ward Thomas's logistics facility in Park Royal.
Mobile +44 (0)7545 868249
Myles Wilcox-Smithadvised Norman Hay on the acquisition of the 38,646 sq ft Unit C at Goodman Logistics's Lyons Park in Coventry.
Mobile +44 (0)7880 788345
Mark Trowelladvised Barking Power Limited on the sale of their 42 acre site in Barking. Amid much interest from the commercial sector the site was sold to a power company.
Mobile +44 (0)7768 987508