Pressure grows on landlords to cut rents

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Many regions in the UK are facing a downward pressure on rents, according to Jones Lang LaSalle’s latest UK Industrial & Logistics Report.

“An increasing number of markets are facing a downward pressure on rents – as vacancy levels are expected to remain high and landlords seek to avoid empty rates liability, particularly in areas such as the South West or West Midlands.”

However, the report goes on to add that headline rents should remain relatively stable in London and the South East, and part of the East Midlands.

The average distribution warehousing rent in the UK stood at £7.20 sq ft in October 2008, growing 1.3 per cent during the last six months. Richard Evans of Jones Lang LaSalle said: “The majority of industrial markets recorded stable rental levels up until September, with growth only seen in a few regions. In particular, rental growth was driven by the South London market (Croydon) on the back of some trade counter deals as prominent buildings were let. However, the market has since seen a marked decline in activity across the country.”

Take-up remained buoyant during the first half of 2008, however it started to fall sharply in Q3 for all sectors as a result of the wider economic situation. The most significant fall recorded was from manufacturing, which decreased by 76 per cent over the second quarter and 61 per cent compared to Q1 2008. The retail sector also saw a 58 per cent decline in demand volume over the quarter and 75 per cent on Q1.

Cameron Mitchell of Jones Lang LaSalle added: “Although the weakening economic conditions led to a decline in new transactions in Q3, strategic relocations, continued outsourcing to 3PLs and changing patterns in the retail sector all supported a new record for large distribution warehouse take-up in 2008. By the end of September 17.3 million sq ft of industrial space had been either leased or acquired by owner-occupiers, already exceeding the total annual 2007 take-up (16.7 million sq ft). However, compared to the first two quarters, take-up plummeted in Q3, down by 65 per cent on the previous quarter.”

David Brooks of King Sturge reported in the company’s annual Property Predictions Report that tenants’ inducements will continue to increase and headline rents will come under increasing pressure. “There will be little speculative development – any speculative development will be confined to smaller schemes being undertaken by local developers looking to generate turnover for their contracting arm.”

In addition, he warned that a two-tier market will continue in the new-build sector – the increased tenants inducement packages being offered in respect of new/modern existing buildings, will be significantly different to the deals that can be offered on Build to Suit schemes, where developers will be significantly less flexible in terms of length of lease (15 year minimum); the quality of covenant on offer and the rent- free inducements/headline rents.

On a positive front for occupiers, land values will continue to fall as more developers/funds offload development sites to reduce holding costs and raise much needed cash.

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