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11.03.2010
New research from Gerald Eve provides the first ever detailed analysis of multi-let industrial properties, particularly the smaller sheds that make up the bulk of the industrial market – what they are, who occupies them and what drives their performance.
In recent years, there has been a perception that distribution warehouses have eclipsed multi-let industrials as a more investor friendly product. However, multi-let industrials still attract major investment through their ability to deliver high-yielding, diverse income with significant added value opportunities through development or asset management.
Sally Bruer, head of industrial research at Gerald Eve, comments: “Multi-let industrial estates have long been thought of as difficult assets to understand in terms of occupation and performance. With this research, we’ve answered some of the questions about this diverse and dynamic sector.”
The study was undertaken in collaboration with major institutional investors including Ashtenne Industrial Fund, Aviva Investors, LaSalle Investment Management, Legal & General Investment Management, PRUPIM and Valad Property Group and covers some 8,500 units across 665 estates with a combined value of £3.7bn (representing 25% of the total IPD universe for standard industrials).
Commenting on the project and their involvement, John Heawood, managing director of the Ashtenne Industrial Fund says, “We are delighted to be involved with this research project, which puts an end to the lack of analysis of the small-shed multi-let industrial property sector in the market. It is a great credit to Gerald Eve that they have dedicated a huge amount of resource towards this research and I am sure that the findings will be widely read and will generate further debate in the market.”
Jonathan Holland, senior fund manager of Legal & General's Industrial Property Investment Fund comments, “This research has provided not only some intriguing insight into the multi-let industrial sector but has also helped us to think about our own property strategy when it comes to this challenging asset class.”
Occupational drivers
Gerald Eve's analysis reveals that, whilst it is a large and diverse sector to which few generalisations apply, the multi-let sector displays a number of key characteristics such as:
- Dependence on the local and regional occupational markets with 59% of units (by OMRV) let to local businesses
- Typically short lease lengths, with the average lease length for units let in the past four years at 6 years – perhaps in response to greater demand for flexibility among occupiers and landlords’ need to fill vacant space
- Dominated by four main groups of occupiers: general manufacturing, high-tech manufacturing, wholesale and transport/communications
Rental level positions
As well as understanding the drivers of occupation, the research has also considered the rents achieved relative to market levels by letting to these occupiers. Gerald Eve has examined in detail the level of over- and under-rentedness of units to determine trends in rental positions. Some key findings reveal that:
- Agreed rents in Wales and the North East show the highest degree of variation from market level rents. Wales has the highest proportion of units over-rented whilst the highest proportion of rents that are under-rented are in the North East
- The rental levels on larger units tend to be closer to market levels than those for smaller units. This trend also follows by lease length: rents for longer leases tend to be agreed at levels closer to market level than on shorter leases
- Retailers are more likely to pay rents closer to market level than any other type of occupier whilst high-tech manufacturers are more likely than any others to pay rents that are below market level and are also amongst the most likely to pay above market level. Bruer adds: “This anomaly arises because high-tech manufactures require bespoke facilities for which they have to pay a premium and conversely, may also receive a discount to stay in these premises beyond the initial lease or to take a building that is not suitable for the majority of occupiers”.
Multi-let industrial void rates
As well as understanding occupational markets and rental level positions, this research has also examined void rates in detail. The analysis shows that, as befits a sector with a reputation for being management intensive, void rates for the sector as a whole stand at 13.2% (based on OMRV) as at the end of 2008. However, there are significant differences by region: the lowest void rates are enjoyed in the South West (10.4%), the South East (10.8%) and the Eastern regions (11.3%) whereas the highest rate is suffered by Wales where voids on multi-let industrial estates run at 20.0%, followed closely by the North West (19.5%).
Gerald Eve’s analysis has also shown not only regional variations in void rates but also that the void rate differs depending the size of units. Void rates tend to decline as the unit size increases – that is, the smaller the units, the higher the void rate.
Investment performance
In terms of investment performance, Gerald Eve’s research has determined that the key factors in determining investment performance are the regional location of an estate and the exposure to the types of tenants on the estate.
Average annual total returns for the sample as a whole stand at 4.9% for the five-year period to end 2008. As ever, there are some strong regional variations with Scotland achieving average annual total returns of 8.2%. Scotland also experienced the lowest level of decline during 2008, falling to a total return of almost -15% compared to an all region low of -21%. Scotland along with the North East also performed well in terms of capital growth over the five-year period, achieving the highest levels of growth, albeit at modest levels of 1.4% and 0.5% respectively. The poorest total returns over 2004-2008 period was delivered by the South East, which reported overall total return of just 4.0% although London was the hardest hit by a fall in capital values, having suffered a decline of -28.4%.
Geography aside, the other factor which influences investment performance is exposure to tenant business focus – that is, who tenants do business with. The strongest performing estates are those which are exposed to a majority of tenants who deal with other local businesses. These estates reported average annual total return of 6.1% over the five years between 2004 and 2008, compared to the sample average of 4.9%. They also delivered the lowest level of decline in capital values over the period and reported some of the strongest rental growth of all estate types.
The fact that investment performance is affected by the regional location of the properties and by the exposure to the business focus of the tenants intuitively makes sense because property market participants – like landlords, tenants and investors – and practitioners – such as valuers and agents – make decisions based on the local and regional economic and property market dynamics.
Outlook for the future
The future prognosis for the multi-let sector is inextricably linked to the economic expectations of the UK’s regions. Inevitably, investment performance will be dictated by levels of occupier demand and will vary greatly throughout the country. The strongest performing areas in the short-to-medium term (ie 2010 to 2013) are likely to be the South East and the East Midlands, along with some parts of the South West, the North West, the West Midlands and Scotland. The areas expected to suffer poorer market conditions for industrial property from 2010 to 2013 are predominantly in the West Midlands, the North West and particularly the North East and also include parts of the South West, the East Midlands, Scotland, Wales and Yorkshire and the Humber.
Gerald Eve, chartered surveyors and property consultants, make or save money from property - acting for around 40% of the FTSE100 on property asset management, agency and professional matters. With nine offices in the UK, Gerald Eve employs 315 people and has 88 partners and 43 associates.
- Gerald Eve’s MULTI-LET research report is the definitive analysis of the UK’s multi-let industrial property market. The total sample comprises 8,411 units and 665 estates, valued at £3.7 billion (as at end 2008). This represents 25% of the IPD Standard Industrials universe by capital value and by number of estates.
- For the purposes of this exercise, the definition of a multi-let industrial estate is an industrial estate usually under single ownership and comprised of different seized units let to multiple occupiers.
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