PRIME LOGISTICS

PRIME LOGISTICS The definitive guide to the UK’s distribution property market Q4 2015 Bulletin

QUARTERLY SUMMARY • • • • • • •

Take-up falls 5% to 9.98 million sq ft in Q4 However, 2015 total of 44.4 million sq ft was the largest on record Amazon acquires 15 buildings totalling 2.4 million sq ft during 2015 Occupier choice remains limited but quality of supply improves 50% of all development starts in 2015 were speculative Prime yields stabilise as pressure to invest eases More prime investment opportunities expected in 2016 given speculative pipeline

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PRIME LOGISTICS The definitive guide to the UK’s distribution property market

E - U P O N R E CO Most Acquisitive Occupier 2015

Most Active Developer 2015

Amazon was the single most acquisitive occupier in 2015 taking 2.4 million sq ft

Prologis was the most active developer, starting over 2 million sq ft of space

RD Q4 TAKE-UP DOWN 5%

STRONGEST EVER YEAR

QUALITY OF CHOICE IMPROVES

Take-up during Q4 was 9.98 million sq ft, which whilst representing a 5% quarterly fall was still above the five-year quarterly average of 9.6 million sq ft. This pushed the annual volume of take-up to 44.4 million sq ft – the largest we have recorded and 5% up on 2014.

The types of occupiers taking space now compared to 2007 highlights just how much the nature of demand for industrial space has changed over the last few years. In keeping with the changes we are seeing in consumer shopping behaviour, supermarkets have largely been replaced with internet retail companies and discount retailers such as Poundland, Aldi and Amazon. Whilst the proportion of takeup represented by retailers and wholesalers is roughly the same as 2007, at around 35%, the business plans and logistics models of the modern occupier are very different.

The availability of logistics property has been incrementally falling since 2010. Little by little, space has been occupied and not replaced. However, such has been the response from the development market during 2015 that the availability rate for all qualities of building levelled-out at 6.8% at the end of Q4. The actual volume of space on the market, including speculative developments under construction, even posted a marginal increase.

It was activity in the East Midlands, particularly the Northern East Midlands, and, the North West which drove take-up during Q4. However, some of the largest deals which were agreed during Q4 were elsewhere as the 313,047 sq ft MK300 unit in Milton Keynes was let to XPO, Bibby acquired 281,000 sq ft at G Park Wakefield and Alloga UK pre-let 220,000 sq ft at Castlewood Business Park. However, it is Amazon who has stolen the headlines again during Q4, committing to 5 buildings totalling around 715,000 sq ft, including a 271,350 sq ft unit at the World Logistics Hub in Manchester. Amazon was the most acquisitive occupier of 2015, taking 15 buildings totalling 2.4 million sq ft. Planning applications for some of these buildings indicate that they may be used for the storage and distribution of food, an observation which supports the idea of these buildings being used for Amazon Fresh or Amazon Pantry, the online grocery arms of the business.

Take-up of floorspace for internet retail distribution (not including dedicated parcel delivery companies or 3PLs) totalled more than 5 million sq ft in 2015. This represents 12% of total occupier take-up for the year and is significantly up from the 3% recorded in 2009 as occupiers continue to take space and realign their distribution networks. With Euromonitor suggesting that the UK is forecast to generate over £18 billion in additional internet retail sales to 2019, and using the ratio established by Prologis that around 930,000 sq ft of additional logistics floorspace is taken to each additional £1 billion of internet retail sales, and the sector looks set to continue to be acquisitive.

Quarterly take-up and five-year average

Annual take-up by occupier sector

Whilst supply has seemingly bottomed-out, it has done so at an all-time low level, and occupier choice remains very limited. Occupiers do have a slightly improved quality of choice however, as the speculative space currently under construction enters our supply figures. Consequently, the availability rate of new or refurbished stock on the market actually rose from 2% to 2.4% at the end of 2015. Occupiers with large requirements continue to have a limited number of existing buildings available to them. This is compounded by the fact that even if occupiers choose to design-and-build premises for themselves, the availability of land, particularly in London and the South East remains extremely tight.

Quarterly availability by quality

Million sq ft

Million sq ft

%

45

14

100

40

12

80

35

10

30

8

25

6

20

60 40

15

4

10

2

20

5

Manufacturing Logistics 10 year average



Source: Gerald Eve

Q4 2015

Q3 2015

Q2 2015

2015

2014

2013

2012

2011

2010

2009

2008

2007

Services Retail & Wholesale Other/Unknown

Source: Gerald Eve

www.geraldeve.com

2006

Q4 2015

Q3 2015

Q2 2015

Q1 2015

Q4 2014

Q3 2014

Q2 2014

Q1 2014

Q4 2013

Q3 2013

Quarterly take-up 5 year average



Q1 2015

0

0

Q4 2014

0

Secondhand New (under construction/refurbishment) New/refurbished (up-and-built)

Source: Gerald Eve



Fourth Quarter 2015

Key logistics investment transactions Q4 2015

Most Acquisitive Investor 2015

Size (sq ft)

Yield (%)

Tenant(s)

87.3 1,200,000

6.0

Various

Caddick Developments

59.0

635,000

5.3

TK Maxx

Property

Location

Purchaser

Vendor

Project Click Portfolio

Bristol, Corby, Crewe, Peterborough

Henderson

Prologis

J33 M62, Knottingley

Wakefield

Tritax Big Box REIT

103 Westerhill Road

Glasgow

Moor Park Capital Partners

Knowsley Business Park

Liverpool

Tritax Big Box REIT

M6EPIC

Wigan

Unit 4, Worton Drive Big Blue, Deykin Avenue Units A & B, Omega Boulevard, Capitol Park

Price (£m)

Delancey

55.0

875,000

8.5

HarperCollins

Hargreaves family

42.4

578,108

6.3

Matalan

Standard Life

Stoford Developments

30.0

335,264

4.8

Poundland

Reading

LondonMetric

Private investor

28.8

229,992

5.8

DHL

Birmingham

Standard Life

LondonMetric

18.2

209,993

5.2

WH Smith

Doncaster

Cabot Properties

Savills IM

14.0

221,592

6.8

Howdens and Croda

Tritax Big Box REIT completed transactions worth over £577m in 2015

Sources: Gerald Eve, Property Data

DEVELOPERS RESPOND IN 2015

YIELDS LEVEL-OUT

OUTLOOK

Several large purpose-built developments completed in Q4, such as the 1 million sq ft Primark warehouse near Thrapston, the 650,000 sq ft John Lewis shed at Magna Park in Milton Keynes and Aldi’s 584,000 sq ft unit at Logistics North in Bolton. On a quarterly basis, the volume of development completions rose by 63%.

The amount of money in the market and the pressure to invest, particularly by institutional and retail funds, moderated in Q4. As a result, we saw prime yields stabilise and investments did not generate the same levels of frantic interest as seen earlier in 2015.

2015 turned out to be a strong year for logistics property with robust levels of occupier and investor demand and a return of meaningful levels of development, particularly of speculative space.

In terms of development starts, 18.9 million sq ft of logistics property started construction during 2015, half of which was speculative. This marked a 28% annual increase in development starts by volume on 2014. Whilst developers responded to the supply shortage, they did so carefully and considerately – focusing on welllocated core locations and constructing a size and specification of building which would attract the broadest remit of occupiers. The average size of building constructed speculatively during 2015 was 155,396 sq ft – considerably smaller than the 197,000 sq ft in 2007, although in terms of quantum, more than twice the amount of speculative space commenced construction in 2007 compared to 2015.

The number of prime opportunities remains tight but we have seen an increase in secondary product on the market (mostly parcelled into portfolios) as landlords attempt to recycle trickier or smaller assets to take advantange of the lack of prime alternatives. Interestingly, it was overseas investors or other new entrants to the market who were some of the keenest bidders on this type of stock in Q4 as they sought to get exposure to the sector.

At the end of Q4 2015, excluding those buildings which have been let during construction, there was 7.8 million sq ft under construction speculatively, 47% of which was in the East and West Midlands.

Tritax was the most acquisitive investor of 2015 and were involved in two of the largest deals of the quarter (see table above). Overall they completed 11 transactions, worth over £575 million during 2015, which increased the size of their portfolio to £1.26 billion. Having said this, by their own standards, Tritax were not as acquisitive in Q4 as they had been earlier in the year, due to the combination of less pressure to spend but also fewer prime opportunities.

Annual development starts by type

Rolling annual warehouse investment volumes

Million sq ft

Billion (£)

20

7.0

18 16

6.0

14 12

5.0

10

3.0

8 4

1.0

2

Dec 2015

Dec 2014

Dec 2013

Dec 2012

Dec 2011

2015

2014

2013

2012

2011

2010

2009

2008

2007

Dec 2010

0.0

0

Speculative Purpose-built

Source: Gerald Eve

PRIME LOGISTICS 2016 FULL UPDATE

– In-depth coverage of 26 key UK logistics markets – A complete review of recent market activity – Rental growth forecasts for each market – A comparison of the distribution prospects for all markets

2.0

6

We expect investors to continue to be attracted to the sector's occupational supply / demand imbalance. This is still sufficiently acute to suggest a compelling rental growth story and will only be helped by the forecast growth of online retail sales, which are predicted to reach 19% of all sales by 2020. We expect prime rents to continue to post positive growth during 2016, albeit at around half the rate of growth seen in 2015.

Now in its eleventh year, the next edition of the Prime Logistics full update will be published in the spring and includes:

8.0

22

Looking to 2016, investors may have more choice at the prime end of the market as the developers and owners of the speculative schemes under construction look to realise profit from their endeavours and investors look to profit-take from investments bought earlier in the cycle. Whilst an increased supply of institutional quality investment stock would certainly be welcomed, it would be likely to divert some of the attention from the secondary market. This could arguably lead to secondary yields stabilising or even moving out slightly as investors revert to better quality opportunities.

Sources: Gerald Eve, Property Data

Email [email protected] to guarantee your copy.

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 Underwood advised Savills IM on the £14 million sale of the Howdens and Croda units at Capitol Park near Doncaster, having previously advised on the acquisition of them for £10.25m in Q2 2014.

Myles Wilcox-Smith advised Roxhill/SEGRO on the pre-let of a 269,000 sq ft unit on plot 5 at Rugby Gateway to Hermes Parcelnet.

Tom Blakely advised Prologis on rent reviews at DC3 Prologis Park, Midpoint (237,648 sq ft) let to Biffa, and, DC4 Bromford Gate in Birmingham (86,207 sq ft), let to Claire’s.

Mobile +44 (0)7545 868249

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Mobile +44 (0)7768 617334

INDUSTRIAL & LOGISTICS CONTACTS Agency Midlands Richard Ludlow Tel. +44 (0)121 616 4802 [email protected]

London Mark Trowell Tel. +44 (0)20 7333 6323 [email protected]

Myles Wilcox-Smith Tel. +44 (0)121 616 4811 [email protected]

David Moule Tel. +44 (0)20 7333 6231 [email protected]

South West & Wales Richard Gatehouse Tel. +44 (0)29 2038 1863 [email protected]

Scotland Sven Macaulay Tel. +44 (0)141 227 2364 [email protected]

North West Jason Print Tel. +44 (0)161 830 7095 [email protected]

Investment

Valuation

George Underwood Tel. +44 (0)20 7333 6396 [email protected]

Richard Glenwright Tel. +44 (0)20 7333 6342 [email protected]

Lease consultancy

Research

John Upton-Prowse Tel. +44 (0)20 7333 6248 [email protected]

Steve Sharman Tel. +44 (0)20 7333 6271 [email protected]

Rating

Sally Bruer Tel. +44 (0)20 7333 6288 [email protected]

Keith Norman Tel. +44 (0)20 7333 6346 [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 2016. All rights reserved.

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