the largest available up-and-built warehouse off the market. .... fundamental attractions of logistics have much more to
PRIME LOGISTICS The definitive guide to the UK’s distribution 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
PRIME LOGISTICS The definitive guide to the UK’s distribution property market
Key occupational transactions, Q1 2016 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
Pre-lets/pre-sales accounted for 48% of Q1 take-up (10% in Q4 2015)
Source: Gerald Eve
MEGA SHEDS DRIVE Q1 TAKE-UP
HOUSE BUILDING SUPPORTS LOGISTICS
SPEC SPACE FILLS SUPPLY GAP
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.
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.
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.
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.
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.
Quarterly take-up and five-year average
Q1 take-up by occupier sector
Source: Gerald Eve
Source: Gerald Eve
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. Speculative developments under construction by region Source: Gerald Eve
Million sq ft
Million sq ft
14
11% Services
12 10
West Midlands
24% Logistics
Northern England
37% Retail
8 6 4
8% Other
2
London
20% Manufacturing
East Midlands South East England
Quarterly take-up 5 year average
www.geraldeve.com
Q1 2016
Q4 2015
Q3 2015
Q2 2015
Q1 2015
Q4 2014
Q3 2014
Q2 2014
Q1 2014
Q4 2013
0 0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
First Quarter 2016
Key investment transactions, Q1 2016
Under construction speculatively at the end of Q1
Property
Purchaser
Vendor
Price (£)
Size (sq ft)
Yield (%)
Tenant
Project Phoenix
CBREGI 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
SPEC COMPLETIONS AT SEVEN YEAR HIGH
PRICES STABILISE
IN OR OUT?
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.
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.
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.
A key finding of Q1 has been the high volume of 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.
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.
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 speculativelydeveloped 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. Rolling annual development completions by type
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. Rental growth forecasts by quality Source: Gerald Eve, IPD
Source: Gerald Eve Million sq ft
%
14
6
12
4
10
Forecast
2
8 0 6
Speculative Purpose-built
IPD Distribution Warehouse rentail growth Gerald Eve average UK prime rent Implied non-prime rental growth
2018
2017
2016
2015
2014
2013
2012
2010
2009
2008
-6 2007
-4
0 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
2
2006
4
2005
-2
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.
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. Mark Trowell advised 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.
Myles Wilcox-Smith advised Norman Hay on the acquisition of the 38,646 sq ft Unit C at Goodman Logistics's Lyons Park in Coventry.
George Underwood advised CBREGI on the £10 million sale and leaseback of Anthony Ward Thomas's logistics facility in Park Royal.
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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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