PRIME LOGISTICS Q3 UPDATE: SPECULATIVE DEVELOPMENT RETURNS

Speculative development returned to the UK’s industrial sector during Q3 2013, with schemes totalling more than 700,000 sq ft starting construction during the past quarter, according to Gerald Eve’s latest Prime Logistics bulletin.

Three market-led speculative starts began in Q3, in core Midlands and southern M1 locations. By comparison the volume of space developed speculatively has been negligible for the past four years. Total development starts – incorporating speculative, pre-let and design-and-build projects – stood at 3.7 million sq ft for the quarter.

Occupier markets also showed positive signs in Q3 2013: although total take-up of large industrial space (units of 50,000 sq ft and above) dipped slightly to nine million sq ft, a fall of 19% from the record levels seen in Q2 2013, it was still 20% greater than the five-year quarterly average. Notable deals included Wren Kitchens & Bathrooms’ purchase of the 750,000 sq ft former Kimberley Clark factory in Barton upon Humber in Humberside, JCB taking the 383,036 sq ft Blue Planet building in Stoke-on-Trent and Hermes Parcelnet acquiring 336,488 sq ft of space at Tamworth 594 in the West Midlands.

Sally Bruer, head of industrial research at Gerald Eve, said: “The shortage of good quality units is finally feeding through to speculative development, a much-welcome fillip for the sector. After four years of virtually no such activity, these four starts herald the return of speculative development and hopefully an easing of the chronic lack of supply in the most desirable locations.

“While take-up was 19% down on the previous quarter, it should be noted that Q2 represented a particularly strong period and a slight falling off was inevitable. A more useful indicator is the fact that Q3 take-up was 20% greater than the five-year quarterly average, underlining the considerable ongoing mismatch between supply and demand in the sector.”

Automotive and logistics driving the market

Logistics companies accounted for 39% of the total UK take-up during Q3, with notably strong demand from the sector in the Midlands, Scotland, London and the South East. It should be noted, however, that much of the demand from the sector in London and the South East was accounted for by short-term lets to accommodate extra requirements associated with Christmas.

While not completing many transactions during Q3, the automotive sector remains highly active in the Midlands and represents a number of live requirements. Jaguar Land Rover and other major manufacturers are in the market to satisfy their requirements for large-scale facilities, which has also led to increased demand from companies in dependent supply chains.

Sally Bruer added: “While pre-Christmas requirements from logistics and home delivery firms accounted for much of the take-up this quarter, the most important sector remains automotive. With not only major manufacturers seeking significant space, but their associated supply chains too, automotive is at the moment central to the fortunes of the Midlands industrial market, and will continue to be so for some time.”

Investment interest

Underpinned by a positive occupational market with prime rental growth, robust levels of demand and the return of speculative development, the logistics sector continues to see strong interest from a range of investors who, in the current market, value the defensive qualities and income security of the sector. This interest has driven prime yield compression and as such, new benchmarks for the current cycle have been set in all income streams over the summer months.

George Underwood, Partner, National Investment said: “Demand, particularly from UK institutions, for long-dated income on prime stock in good locations remains particularly intense and shows no signs of abating. To this end, September saw the lowest prime yield being paid on a distribution warehouse since the beginning of 2008 with Gazeley’s forward sale of the John Lewis unit which is under construction in Milton Keynes. This rare combination of strong location and annuity income generated aggressive bidding from a combination of UK funds and overseas investors, before finally being sold to Aviva Investors for £76.5m reflecting a net initial yield of 4.75%.”

First produced in 2006 (analysing the 2005 market), Gerald Eve’s Prime Logistics report focuses solely on industrial warehouse properties of 50,000 sq ft upwards.