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gva.co.uk
Industrial Intelligence Spring 2015 gva.co.uk UK Occupier overview • The industrial sector has seen diminishing supply over the past six months, improving demand, an exceptional investment market and a significant uplift in speculative development across the country. • Take-up of modern distribution units over 100,000 sq ft amounted to 22.6 million sq ft during 2014, 11% above the five year average, the highest level since 2010 and in line with pre-recessionary levels. There has been a sharp increase in take-up of second hand space as the better quality units have become fewer. • Retailers took just under half the total space as they continue to create more efficient supply chains with an increasing need for regional distribution centres, serving smaller satellite units, closer to population centres. Retailers responding to e-commerce and expanding omnichannel and digital media continue to generate growth. • As with last year activity has been healthy in the manufacturing sector and in particular the automotive industry in the Midlands and the North West. The most significant deal was 470,000 sq ft letting to Jaguar Land Rover at Prologis Park, Midpoint, Birmingham. JLR’s investment in new models has led to a number of requirements from component suppliers. • In other significant deals, third-party logistics giant Norbert Dentressangle has taken ‘Big Foot’ in Daventry, a one million sq ft building, from where it will service its contract to Amazon. Staples has taken 528,000 sq ft in Corby and Victoria Plumb has recently taken 277,000 sq ft at V277, Doncaster in a relocation and expansion from Hull. • Following the success at Omega North near Warrington there have been two recent deals at Omega South. Internet retailer The Hut Group signed the largest deal in the North West last year, a 690,000 sq ft pre-let at £5.50 per sq ft, funded by London Metric at £47.5 million, an initial yield of 7.5%. In significant inward investment to the region, international manufacturer Plastic Omnium has also recently signed a 240,000 sq ft turnkey freehold at £23 million. • Enquiries and requirements are strong in the South East, Midlands and North West. In the South East discount food retailers Lidl and Aldi both have requirements along with a further enquiry from Amazon. Discount retailers are also amongst the larger requirements in the Midlands: 200,000 sq ft for The Range and 175,000 sq ft for The Works, together with an ongoing requirement from B&M Stores for a major Midlands warehouse. There has been an increase in enquiries from advanced manufacturing and aircraft component companies in the North West and from manufacturers in Yorkshire. • Many requirements from logistics companies are still for 3 to 5 year leases, in order to match the contracts they are being awarded, although landlords are increasingly insisting on minimum 10 year leases as well as pressing for increased rents at lease renewals. • The last year has seen a step change in the decline of available good quality units. There is currently less than a year’s supply of modern distribution units over 100,000 sq ft across the country based on past take-up rates. With the shortage of prime supply there is increased interest in secondary stock in good locations and we are beginning to see pockets of unsatisfied requirements in certain parts of the country. Take-up of three large sheds in the North East over the past three months has left very little supply and the lack of availability in the South West is leading to the first signs of speculative development. • The speculative development market is responding to the supply shortage, particularly in the South East, Midlands and the North West. This time last year design and build accounted for the majority of new stock and there were only a handful of small speculative developments underway. There is now over 5 million sq ft of speculative units across the country under construction or with imminent start dates. Predominantly this is for big sheds outside the South East but around London there are an increasing number of smaller unit schemes in the pipeline, important for service based companies with customers in the City and West End. The re-emergence of speculative development is covered in more detail at the end of this bulletin. • The strong demand and falling supply of good quality stock has impacted on headline rents and incentives have also hardened, halving in certain locations since the depths of the recession. Of the key UK locations that GVA monitor (see map) net effective rents have increased by an average of 11% over the past year, with the South East locations showing the strongest growth. In Focus: London and the South East There is a broad level of occupier activity in London and the South East servicing the growing London economy and the wider South East market. Increasing business confidence is encouraging occupiers to invest and acquire modern better specified units. Take-up of modern distribution units over 100,000 sq ft amounted to 4.8 million sq ft in London and the South East in 2014, 21% of the UK total. In the big shed market, the latest large deals have been led by the food retailers including 900,0000 sq ft to Waitrose in Milton Keynes and 600,000 sq ft to Ocado in Belvedere. Among the logistics companies Eddie Stobart took 410,000 sq ft in Dagenham and Kuehne and Nagel were active in Feltham. Major Recent Deals in London and the South East Quarter Property Occupier sq ft Deal Rent (£ psf) Q1 2015 Erith Ocado 600,000 Pre-let £9.80 Q3 2014 Dagenham Eddie Stobart 410,000 Secondhand £7.30 Q3 2014 Harlow Brake Bros 270,000 Secondhand £6.00 Q3 2014 Green Park Way, Greenford Royal Mail 246,802 Secondhand £5.95 Q4 2014 Hoddesdon 3663 220,000 Modern £7.25 Q3 2014 Swallowdale lane, Hemel Hempstead Robert Dyas Holdings Ltd 189,254 Modern £5.80 Q3 2014 Prologis, Didcot Better Bathrooms (UK) Ltd 166,583 Modern £6.50 Q1 2015 Heathrow DHL Express (UK) Ltd 150,000 Pre-let £15.00 Q3 2014 Girling Way, Feltham Kuehne and Nagel Ltd 121,450 Modern £12.95 London and the South East prime rents Key Available Units in London and the South East Property 14 DC380, Harlow 380,463 Modern £7.25 12 London Gateway 316,561 Under Construction £8.25 10 DC1, Dunstable 316,339 New £7.25 Logic 233, Dagenham 232,965 Modern £8.25 M4ssive, Reading 230,334 Secondhand £8.50 DC1, Milton Keynes 209,951 Secondhand £5.25 Erith 180 180,378 Modern £8.10 Expansion, Enfield 166,850 Modern £10.75 Access 8, Hemel Hempstead 129,233 Modern £7.50 97,000 Under Construction £9.25 £ psf 16 8 6 4 2 0 Enfield Heathrow Park Royal Milton Keynes March 2014 Reading Southampton March 2015 West Thurrock Enfield SIze Grade Quoting rent (£ psf) More recently this year John Lewis has confirmed it is to open a new 638,000 sq ft distribution centre in Milton Keynes, where along with Waitrose they already occupy over two million sq ft. Mainly focused on large furniture, electrical and home furnishings, the new warehouse will support the growth of the retailer’s omni-channel offering. It has been a very proactive few months for SEGRO, who has also purchased BMW’s Bracknell site where it plans to replace existing warehousing with a variety of different units up to 230,000 sq ft. It has renewed its simplified planning zone agreement with Slough Borough Council for a further 10 years enabling automatic planning permission on the Slough Trading Estate. With an increased level of take-up, the supply of good quality modern sheds in London and the South East remains tight. As a result the region has experienced the greatest increase in speculative development over the past 12 months. With the lack of quality stock on the market, this new space is letting well and in many cases is being pre-let during construction. This in turn is likely to increase the level of development over the next year. Pressure continues to increase on industrial land around London for competing uses, such as residential and particularly in West London where employment land is in very short supply. The area will also be affected by HS2 with blighted sites in Park Royal. E-commerce continues to drive the mid-market (30,000 sq ft to 100,000 sq ft), with the growth of digital retailing increasing demand for strategically placed industrial sheds. Specifically, the market is seeing a rising demand for smaller distribution units close to central London with larger hubs positioned outside the M25. This competition for industrial land use as well as the weight of institutional investment being targeted towards the industrial market is being reflected in land values. Over the year to March land values in Park Royal have increased from £2 million per acre to £2.25 million and in Enfield they have jumped from £900,000 per acre to £1.5 million. As an example a 2.3 acre site in Tottenham recently received 24 bids and is now under offer. For example, last November, Ocado signed a 15 year lease on a 68,000 sq ft unit on SEGRO’s West London development Origin at Park Royal. As part of the second phase of development, due to start this Spring, John Lewis has signed a 25 year pre-let on 108,000 sq ft which, subject to planning, will be built-to-suit. The freehold owner occupier market for units up to 20,000 sq ft is also strong. There is now a greater emphasis on speculative development in this size range and it is gaining strong occupier interest. Kier has three schemes at Uxbridge, Hayes and Frimley, with Chancerygate and Goya also active acrosss the South East. Similarly, global logistics company DHL has agreed a pre-let deal with Howard Group for a 57,000 sq ft warehouse in Lewisham at £16 psf. DHL will relocate from its former Nine Elms, Battersea operations and will occupy the whole of the Tea Shed development. SEGRO and Aviva have also confirmed a 150,000 sq ft pre-let to DHL, on a 25 year lease at around £15 psf, in what is Heathrow airport’s largest letting since 2002. In the year to March, prime rents have increased by between 10% to 15% in Park Royal, Enfield and West Thurrock to £14.50, £9.75 and £8.50 psf respectively. UK distribution investment market Investor demand for UK distribution property has been exceptional over the past year, driven by both domestic and overseas buyers. UK distribution property investment transactions in 2014 amounted to £4.7 billion, the highest on record and 85% above the five year average. Yields continue to see downward pressure with average UK distribution yields falling by 97 basis points during 2014 (IPD annual index), compared to all-property, which moved in by 67 basis points. The industrial sector continues to prove popular with increased investor demand from both domestic and overseas buyers. UK institutions (43%) and UK property companies (34%) accounted for the majority, with overseas investors accounting for 14%. Key Investment Deals Location Area Sq ft Unexpired Lease Term Project Eagle 1,600,000 4 years Ocean Portfolio/Fradley Park 3,798,870 £15,600,000 (£4.10 psf) Various £226.5m 6.50% Dec-14 Orbital Portfolio 1,017,100 £6,400,000 (£6.30 psf) Various £113.8m 6.15% Dec-14 Crossdox, Erith (Funding) 560,000 30 years £5,488,000 (£9.80 psf) Ocado £98.8m 5.25% Jan-15 G.Park, Swindon (Funding) 55,898 25 years £642,827 (£11.50) TNT UK Ltd £11.8m 5.15% Dec-14 Factory Lane, Croydon 172,000 6 years £1,227,000 (£6.70 psf) Tesco £21m 5.50% Dec-14 G. Park, Stoke on Trent 382,949 10 years £1,684,976 (£4.40 psf) JCB World Logistics £29m 5.45% Dec-14 Magna Park, Lutterworth 194,678 6.5 years £995,530 (£5.11 psf) Toyota £17.4m 5.40% Dec-14 Magna Park, Lutterworth 122,231 6 years £610,000 (£5.00 psf) P&O Ferrymaster (Sublet to Asda) £10m 5.10% Nov-14 West Ham Industrial Estate, Basingstoke 454,000 7 years £2,500,000 (£5.50 psf) Sports Direct, Torque Logistics £40.35m 6.25% Nov-14 Rent Tenant Price Yield Date £5,200,000 (£3.60 psf) Various £60.18m 8.00% Jan-15 Q1 2015 has seen limited supply in the UK distribution investment market resulting in strong competition for product. Prime assets together with good quality secondary estates continue to lead the charge owing to an improving occupational market, improving rents and strong rental growth prospects. Market sentiment is positive particularly in the urban logistics sector owing to constrained land supply and an evolving retail sector. Notable transactions towards the end of 2014 included the sale of the P&O Ferries and Toyota distribution units at Magna Park, each let for a further six years and achieving yields of between 5.10% and 5.40%. More substantial lot sizes have been subject to considerable demand with portfolio sales and larger multi-let estates achieving a premium owing to both the weight of money in the market and their ability to offer diversification of income. The sale of West Ham Industrial Estate is also worthy of note achieving a yield of 6.25%, 125 bps in excess of quoting. With the weight of investment and lack of quality product in the market, investors are looking further up the risk curve, where they can drive returns, encouraged by stronger occupational performance; although many buyers remain frustrated at the level of competition in the market. In addition to the recent increased demand for value-add opportunities there has also been a renewed interest in forward commitment, development funding and speculative development, particularly from institutional buyers. The additional risk associated with these opportunities provides investors with targeted returns that are more difficult to obtain at current pricing levels. Over the medium to longer term we expect economic growth close to trend and the occupational market to continue to improve. The increased interest in retail distribution/ logistics space and constrained land supply will place further pressure on rents providing improved performance to those investments that have traded at low initial yields. We are extremely positive about the outlook and we expect yields to continue to harden over the short term with an expectation of more moderate capital growth towards the end of the year. We expect the distribution sector to outperform other core sectors in 2015, buoyed by strong occupational demand that is as much reliant on the continued structural shift to internet retailing as on the economic growth cycle. We forecast a double-digit total return of 13% for 2015 (following 23% in 2014), compared to all property at 11.5%, from a combination of yield compression plus average UK rental growth of 2.3%. Speculative Development (2015) Scheme Developer / Fund Size (sq ft) Comments LONDON AND SOUTH EAST Andover Business Park Goodman / Anglesea 336,800 Completion in 2016 London Gateway Prologis 316,561 Completion Q2 2015 Kingsnorth Commercial Park Goodman / Anglesea 226,570 Completion in 2016 Dagenham Standard Life 190,000 Completion April 2015 Magna Park, Milton Keynes Gazeley 185,000 Completion Autumn 2015 Stockley Park, Heathrow Prologis 139,000 Completion Autumn 2015 Enfield Gazeley 100,557 Completion in 2016 Buckingham Ave, Slough Trading Estate SEGRO 70,000 Completed Liverpool Road, Slough Trading Estate SEGRO 60,000 Completed DC7 Prologis, Grange Park, Northampton Prologis 341,000 Completed Derby Commercial Park Goodman / Anglesea 323,895 Completion Autumn 2015 Grange Park, Northampton Goodman 304,000 & 162,000 Completion Autumn 2015 G Park, Royal Oak Way, Daventry Gazeley 297,000 Completion Autumn 2015 Rugby Gateway Roxhill and SEGRO 237,000 Construction started Jan 2015 Central M40, Banbury Barwood / BA Pension Fund 235,000 Completion Summer 2015 Magna Park, Lutterworth Gazeley 180,000 Completion End 2015 Silver Bullet, Coleshill Canmoor 143,000 Completion Summer 2015 Chrome 102, Midpoint, Birmingham Rockspring 102,000 Completion Summer 2015 Airport City, Manchester Stoford / Mountpark 220,000 Planning granted Revolution, Chorley Evander / BAPF 184,000 Started on site Jan 2015 Union Square, Trafford Park Marshalls CDP/ M&G 175,000 PP submitted Venus 110, Knowsley New Capital Knowsley 110,000 On site Link 95, Heywood Graftongate / Aviva MIDLANDS NORTH WEST 95,000 On site Summer 2015 YORKSHIRE Tri-link 140 Normanton Yorvale / Kier / Maple Grove 142,000 Completion Autumn 2015 Mountpark Wakefield, Normanton Mountpark / Stoford 133,000 Completion Autumn 2015 East Leeds - Connex 30 and 50 Wilton Developments 80,000 Completion Summer 2015 Logic, Leeds Muse developments 80,000 Completion Summer 2015 Gateway 36, Barnsley Harworth Estates 65,000 Completion January 2016 AMP, Rotherham Rotherham MBC 52,000 Built Unit 2, Victory Park, Sheffield Property Alliance Group 50,000 Built Trident Park, Normanton CDP / St Brides 30,000 Completion Spring 2015 100,000 Completion Spring 2015 NORTH EAST Portobello Trade Park, Gateshead MGL Developments Axis 19, North Shields Northumberland Estates 30,000 Completion Spring 2015 Larch Court, North Tyneside Hellens Group 35,000 Completed St Modwen 37,000 Completion January 2016 SOUTH WEST Access 18, Avonmouth Speculative development With the rapidly diminishing supply of prime stock, robust occupier demand and a strong investment market, there is a growing appetite for speculative development. A year ago there were only a handful of schemes in the South East and Midlands. Today we have calculated that speculative development under construction or with imminent start dates amounts to over 5 million sq ft. A number of funds are aligning themselves with leading developers and are actively pursuing opportunities in prime locations. With the lack of quality investment portfolios, speculative development presents funds with an opportunity to acquire new well specified stock and enhance their returns by sharing in the development profit. Funds will generally expect to receive a large proportion of the profit with the developer being incentivised to let the property quickly. Prologis, Goodman, Graftongate and Gazeley are the main developers progressing sites in the big shed speculative market near the ‘Golden Triangle’, Daventry, Rugby and Northampton. SEGRO have also been very proactive in building up a speculative development portfolio in London and the Thames Valley. Other active developers such as Goya, Kier and Chancerygate are aligning themselves with funds such as Legal and General, Aviva, BlackRock, DTZ IM, M&G, Cordea Savills and LaSalle. The recent speculative tie up between Goodman and Anglesea provides strong evidence of the improving development market. Anglesea has agreed to buy a number of standing income producing assets and in return will provide speculative development funding on three sites, totalling over 1 million sq ft at Derby Commercial Park, Andover Business Park and Kingsnorth Commercial Park in Kent. The units between 266,570 sq ft and 336,800 sq ft are subject to planning and will be developed by Goodman, with completion expected early 2016. Outside the main distribution centres, there are fewer big shed speculative schemes proposed although speculative development is underway at Normanton, East Leeds, Gateshead and Avonmouth UK land values and rents Glasgow £5.50 psf 18 months £175k per acre Key Newcastle Prime rent, £psf (50,000 sq ft unit) Rent free (months on a ten year term) Land values per acre (assumes 5 acre plot) £5.50 psf 9 months £200k per acre Funds are particularly keen on the industrial market for a number of reasons: £5.50 psf 9 months £300k per acre 4000 • Both income and capital returns are outperforming the office and retail sectors • The buildings can be constructed quickly, particularly where infrastructure is already in place In addition, availability of development finance is improving, interest margins are declining and loan-to-cost ratios are increasing. Over the last two years there has been a marked increase in construction orders (a proxy for development activity), but from a very low base, as the chart below shows; which has led to a sharp increase in construction prices. Orders are heading towards more normal levels seen between 2000 and 2004, rather than the more heady levels from 2005 to 2007. Immingham Liverpool 3000 Sheffield £5.25 psf 9 months £325k per acre 2500 2000 Coventry £5.95 psf 9 months £500k per acre 1500 Birmingham £5.95 psf 9 months £500k per acre 1000 500 • Planning is not particularly contentious. Planning policy changes in support of a growth agenda have helped create a more developer friendly environment Leeds £5.50 psf 9 months £325k per acre 3500 £ million • The sector’s exposure to e-commerce. The American developers in particular, such as Prologis and Logicor have seen the positive effect of this market in the US Teesport Manchester Industrial contruction orders (12 month total / 2005 prices) 0 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 Factories 2007 Q1 2008 Q1 2009 Q1 Warehouses Current speculative construction amounts to about a quarter of 2014 annual take-up over 100,000 sq ft, so building is still only being targeted in the best locations, such as London, Birmingham and Manchester where supply is tight. In the prime areas the increased level of activity has impacted on land values. Of the 13 locations that we monitor we have seen an increase of 17% in land values over the year to March, with locations in the South East showing the strongest growth. 2010 Q1 2011 Q1 2012 Q1 2013 Q1 Northampton £6.15 psf 9 months £500k per acre Felixstowe 2014 Q1 London Gateway Cardiff £4.95 psf 12 months £250k per acre Avonmouth Bristol £6.40 psf 10 months £400k per acre Park Royal West Thurrock £14.50 psf 6 months £2,250k per acre £8.50 psf 6 months £850k per acre Southampton Enfield Portsmouth £9.75 psf 6 months £1,500k per acre Dover London Birmingham Bristol Cardiff Dublin Edinburgh Glasgow Leeds Liverpool Manchester Newcastle Published by Bilfinger GVA. 65 Gresham Street, London EC2V 7NQ. ©2015 Copyright Bilfinger GVA Bilfinger GVA is the trading name of GVA Grimley Limited and is a principal shareholder of GVA Worldwide Limited, an independent partnership of property advisers operating globally. Bilfinger GVA is a Bilfinger Real Estate company. Should you wish to discuss the findings of our research in greater detail please do not hesitate to contact: National Industrial and Distribution team Nick Collins Senior Director 020 7911 2112 nick.collins@gva.co.uk Robert Dunston Senior Director 0161 956 4202 robert.dunston@gva.co.uk David Willmer Senior Director 0121 609 8302 david.willmer@gva.co.uk Mark Beaumont Senior Director, Investment 020 7911 2183 mark.beaumont@gva.co.uk Neil Dovey Senior Director, Investment 020 7911 2168 neil.dovey@gva.co.uk Giles Tebbitts Research 020 7911 2670 giles.tebbitts@gva.co.uk gva.co.uk This report has been prepared by Bilfinger GVA for general information purposes only. Whilst Bilfinger GVA endeavour to ensure that the information in this report is correct it does not warrant completeness or accuracy. You should not rely on it without seeking professional advice. Bilfinger GVA assumes no responsibility for errors or omissions in this publication or other documents which are referenced by or linked to this report. To the maximum extent permitted by law and without limitation Bilfinger GVA exclude all representations, warranties and conditions relating to this report and the use of this report. All intellectual property rights are reserved and prior written permission is required from Bilfinger GVA to reproduce material contained in this report. Bilfinger GVA is the trading name of GVA Grimley Limited. © BIlfinger GVA 2015. 10342 08449 02 03 04
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