Tuesday 25th Oct 2016 - Logistics Manager

It’s all about the money

Indeed King Sturge’s latest Industrial Floorspace Report says: “The level of industrial development under construction on a speculative basis within Greater London has fallen. There is currently some 602,542 sq ft under construction across eight schemes; this represents a significant fall of 840,284 sq ft.”

Looking at the rest for the South East, the report continues: “The level of industrial development on a speculative basis has decreased by 524,148 sq ft since our previous survey. The figure currently stands at 848,400 sq ft across 11 schemes.”

The vast majority of these schemes are for smaller units (under 30,000 sq ft) and many have already secured funding prior to the crunch.

Nigel Godfrey of Gazeley says: “In the near future there will be an immediate shortage [of space]. There will be a bit of a scramble, say, in the next couple of years to secure what is left of the new space and there will be a time lag before supply catches up with demand. However, at the moment there are a number of units in all shapes and sizes currently available.”

These include a variety of warehouses across the region on offer through Gazeley. There is Voltaic in Dagenham, which totals 232,965 sq ft on an 11-acre site located adjacent to the A13. It has 12m eaves, a 50 kn/sq m floor loading, 20 dock levellers and three level access doors, 43 HGV and 144 car parking spaces. On an eco level, it boasts solar photovoltaics, 15 per cent roof lights, a solar thermal hot water system, ground source heat pump and low water use appliances. Letting agents are Altus Edwin Hill and Colliers CRE.

There is also G.Park Thames Valley in Thatcham where the developer has a 255,825 sq ft warehouse available boasting 12m eaves, 25 dock and two level access doors, a 50m yard and a floor loading of 50 kn/sq m. It is being marketed by CB Richard Ellis and GVA Grimley.

Other large warehouses available in the South East include Propinvest and Capmark Investments’ Mistral 260 – a modern, high bay 260,000 sq ft warehouse unit in Hemel Hempstead. Originally developed by Gazeley, Mistral 260 is available on either a freehold basis or on flexible lease terms and offers a 260,000 sq ft high bay warehouse. It has an eaves height of 12m, a yard depth of 50m and boasts 23 dock and two level access doors. Last year agents Savills and CB Richard Ellis were marketing it on lease terms only at a rent of £8.50 per sq ft.

However, this year Charlie Howard of M3 – newly appointed to market the scheme – says: “With competitive terms and flexible leases being sought by many occupiers, we are extremely well placed to offer such occupiers bespoke and highly competitive solutions to their warehouse and industrial needs at Mistral 260.” New joint letting agents for Mistral 260 are M3 and Lambert Smith Hampton.

Other schemes available on more attractive terms include ProLogis’ ProLogis Park Heathrow where there are three units of 67,794 sq ft, 73,996 sq ft and 94,788 sq ft. Letting agents Knight Frank and Savills are quoting £13 per sq ft, a 3.7 per cent drop equating to 50 pence per sq ft on last year’s quoting rent.

In the current climate there are deals to be done that are definitely in the occupiers’ favour, and, with a relatively large number of warehouses available, as long as there is some flexibility on exact location, then hard bargains can be delivered.

However, tenants should note that not all offers will be accepted even though the situation looks dire for landlords and developers at the moment. Paul Chaterjee of Knight Frank says: “Some tenants’ expectations are a little unrealistic and while landlords may not accept cheeky deals they will accept sound proposals. It must be remembered that many landlords are not willing, and in some cases, not able to make a considerable loss even in the short-term.”

So what is on offer? Well, better incentives for a start and possible reductions in rent in the medium-term as long as the headline rent is maintained.

Dominic Whitfield of Savills says: “The norm is trying to keep quoting rents where they are and recently landlords have taken a harsh knock on values due to yield movement so they are keen to avoid further damage by reducing rents if they can avoid it.”

The fixation with headline rent stems from the fact that property companies are reluctant to have the value of their property portfolios reduced to such an extent that they start to breach their loan to value covenants. If a property company got into such problems it could be forced to sell assets to make up the shortfall. So, for the short-term, incentives are where the hard bargaining is going to take place. According to Lambert Smith Hampton’s National Industrial and Distribution Report 2009: “We expect to see incentives rising significantly over the next two years across all markets as landlords seek to offload stock and reduce the burden associated with empty rates.”

Richard Evans of Jones Lang LaSalle says: “Developers and funds are being much more pragmatic and will look at freehold as well as leasehold deals and in some cases even the concept of a three year lease term is not necessarily dismissed out of hand.”

Jones Lang LaSalle is marketing 12 Point, a new 142,000 sq ft warehouse built on the site of the former Iron Mountain building at Bromley-by-Bow in East London. Nigel Harris of JLL, says: “Given there is very little stock of this quality in the area, and short-term leases may be considered, we are confident the space will appeal to a range of occupiers; particularly for Olympic-related contracts.”

The building is located on the established ProLogis Park in Bromley-by-Bow, and has 12.5m eaves height, 12 docks and four ground doors, 50 kn/sq m floor loading, plus 1,000 kVA power transformers. The property is available to let on the basis of assignment or sublet. Short-term/flexible leases may also be considered.

The same attitudes apply to those offering second-hand or even refurbished buildings. Jim O’Connell of Glenny is marketing a 66,000 sq ft warehouse formerly occupied by Tate & Lyle. He says: “We are acting on behalf of a property company, which understands the requirements of contract-led distribution firms and therefore has adopted a flexible view to lease terms.”

The facility is located at Unit 38/39 at Purfleet Industrial Estate in Purfleet, Essex close to Junction 30 of the M25 motorway. It has an eaves height of 9.15m and is partly fitted out with modern racking systems. Work is planned to increase the number of roller shutter doors from three to seven.

Godfrey points out that tenants willing to take longer leases can secure some of the best deals. “Gazeley can offer better deals if we secure longer leases as there is increased value for longer-term commitment. Developers therefore can offer better incentives.”

Almost every developer in the region will look at the options available. Brixton has its revolutionary two-storey warehouse at Heathrow, which was to have been let as a single unit but is now also available in up to eight separate units starting from 21,600 sq ft. Configured for high capacity throughput and lower unit costs, X2 offers full lorry access and loading on both of its levels. Both levels have their own service yard area with the upper level accessed by two one-way ramps.

There had been much controversy regarding the quoting rents for the building at £17.50 and £19 per sq ft against the £13.50 to £14 per sq ft quoting average for the area. However, the developer has indicated that the facility is being marketed on flexible lease terms. Letting agents are CB Richard Ellis, Swire Associates and King Sturge.

Brixton also has Unit 2 at Greenford Park totalling 100,423 sq ft, which can be split into three units from 18,900 sq ft as well as one building totalling 122,398 sq ft at Polar Park, available through letting agents CB Richard Ellis, and King Sturge.

It has ten-metre eaves as well as six dock level loading doors and five level access doors, a floor loading of 50 kn/sq m and a three phase power supply of 550 kVA. It boasts dedicated yard areas with lorry parking as well as parking for 144 cars.

For second-hand buildings that are considered too old and thus too expensive to refurbish the situation is more keenly felt and many landlords are looking to demolish. Indeed SEGRO’s Old JAL building in Poyle is believed to be up for demolition shortly owing to market conditions and the empty rates.

For those looking for a more bespoke option there are plenty of sites with planning permission but it must be noted that the deals done here will not be anywhere near as generous as those on existing buildings, partly because developers and landlords cannot afford to be, and partly because they do not need to be.

Godfrey points out that for those opting for design and builds, development can be achieved very quickly in about 12 weeks for a basic building. However, he adds: “You do have to have an adequate lead-in time to obtain detailed planning permission and to secure all the legal documentation.”

Gazeley has several sites in the region including G.Park Enfield where it has planning permission for a 366,960 sq ft warehouse with 15m eaves. It also has space for D&B units at its G Park Sittingbourne scheme in Kent where Morrisons has secured a 950,000 sq ft RDC.

Meanwhile ProLogis has secured planning for two further units at ProLogis Park Heathrow. DC5 and DC6 will provide 73,830 sq ft and 132,072 sq ft of secure, high quality distribution space with ancillary office accommodation. While DC5 has a clear internal height of ten metres, DC6 has an eaves height of 12 metres and a second planning consent means that DC6 can be subdivided into two units of 61,150 sq ft and 67,157 sq ft.

Bericote Properties has a site in Erith previously known as Bronze Age Park. There is planning permission for three buildings of 425,000 sq ft, 85,000 sq ft and 124,600 sq ft. Bericote purchased the 38 acres at Bronze Age Park for £800,000 per acre from Apollo/Astral in 2007.

As far as speculative development is concerned, Robin Catlin of Atisreal sums it up: “It is very difficult to anticipate when the development market will return – perhaps nine to 18 months is realistic. Whatever happens, there needs to be a fairly dramatic shift in market sentiment for developers both in terms of funding and values.”