There’s an upturn of interest in the region but does this mean that the tide has turned? Liza Helps investigates.
Enquiries are up and property agents, developers and landlords are more than ready to cut a deal. According to Nick Roberts of Bidwells: “Enquiries are coming back into the market particularly for warehouses in the 200,000 – 300,00 sq ft range”
Indeed, research at Bidwells concludes: “Over the first half of the year, occupier demand reached a five-year high, with 4.2 million sq ft of requirements recorded on the Bidwells system. The increase in demand has largely been evident at the larger end of the market, with requirements for units in excess of 50,000 sq ft up by 44 per cent over the past six months to 3.65 million sq ft.”
Rumour has it that Butchers Pet Care, ASOS and 99p Stores are looking for units in excess of 250,000 sq ft while there are two further enquiries for larger sheds in the region of 500,000 sq ft plus, one for 300,000 sq ft and another for 150,000 sq ft.
And there is plenty of space on the market at present to satisfy demand. Indeed, Sally Bruer of Gerald Eve notes in the latest Prime Logistics Autumn Bulletin that there is some 106 million sq ft of warehousing space available across the country in units of 50,000 sq ft plus – a large slug of that in the Midlands.
However, she says: “The majority of the available space is second-hand and almost 12 million sq ft of additional second-hand space has come to the market in just the past six months.”
She adds: “The supply of newly developed warehousing space has been marginal in the first half of the year. Only 2.8 million sq ft of space was completed in the first half of 2009; the lowest level of development completions in the past ten years. And of the space completed this half year, only 1.2 million sq ft was built speculatively, also the lowest level for a decade.”
According to King Sturge’s latest Industrial Floorspace report, the East Midlands has seen a signi?cant drop in the level of speculative development under construction. At the end of January 2009 there was a total of 161,738 sq ft under construction across just six schemes, which represents a 91 per cent reduction since July 2008.
In terms of space available, King Sturge recorded that over the full year in 2008, the level of available ?oorspace in the East Midlands increased by 7.1 per cent, some 1,413,744 sq ft, with availability in large buildings of more than 100,000 sq ft increasing by 53.3 per cent, 4,257,593 sq ft, over the same period. New available ?oor space increased by 19.2 per cent between December 2007 and December 2008.
Available schemes include Fourteen:45 at Warth Park Way, Raunds, which has been on the market for nigh on two years. The development, on an 11.6-acre site, totals some 245,612 sq ft and boasts an eaves height of 11.5m. It has 23 dock and four level access doors, a 50kN/sq m floor loading, and is being marketed at £4.50 by joint agents Cushman & Wakefield and North Rae Sanders.
While there is so much space available, tenants are in an excellent position. Charles Smedley of Lambert Smith Hampton says: “Property owners are willing to negotiate deals and in some cases with some spectacular incentives to endeavour to secure a tenant for their property, and to assist them in limiting their ongoing empty rates liability.”
Indeed, Roberts says: “We have the situation where a strong covenant will attract a rent-free period of 12 months for every five years of guaranteed income.”
Gerald Eve’s Prime Logistics report notes that this is: “a market of opportunities for occupiers”. It has started to see headline rents soften in the past six months with an average decline of 4.5 per cent across the country (although in some markets, rents have fallen further while in others they have stayed flat). Incentives being offered by landlords are some of the most attractive seen since the beginning of the 1990s.
As a rule of thumb, owners of new space are under a lot of pressure, especially from those with second-hand space, which already comes fitted out with at least heat and lighting, and in some cases racking. This means for an incoming tenant capital expenditure is kept to a minimum. Due to its fit out second-hand accommodation is generally more readily available, and in the majority of cases owners can accommodate short-term leases with more flexibility. Indeed there is a plethora of deals in second-hand units that stand as testament. Wincanton has taken a short-term let on Gist’s 220,000 sq ft warehouse in Rugby at a passing rent for a contract with Sainsbury’s. The building was ideal because it was already racked.
Robert Rae of North Rae Sanders says: “Racking is a big cost for an occupier and is unjustifiable on a short-term lease.”
Second-hand space is also usually available at a discount to more modern space. Recently, menswear clothing and footwear company Style Holdings took a 90,000 sq ft warehouse at No1 Building, Sanders Lodge, Rushden, Northamptonshire at a rent in the region of £3.25 per sq ft.
The second-hand property has 5.64m eaves as well as 15 doors. It has an office content of two per cent. The building lies close to the A45 trunk road, which provides fast links to the A14 and the M1 motorway. Style Holdings is looking to distribute across the region.
So what does this mean for landlords of modern units? Well, it means that incentive packages have never been so good. ProLogis for instance has taken the bull by the horns and is offering extremely competitive deals that could include lighting and heating as part of the package. It has certainly secured interest and one or two deals that possibly it might not have been in the running for, though that of course is mere market speculation.
One deal that is rumoured to go ahead shortly is the letting of the final 150,000 sq ft unit at ProLogis Eurohub in Corby.
The property has 10,000 sq ft two-storey offices, 12 Hörmann and two level access doors, 22 lorry and 141 car parking spaces, as well as a 50m-deep yard. It was being marketed at a rent of £4.75 per sq ft through joint letting agents North Rae Sanders and Budworth Brown.
With landlords and developers willing to go to, in some cases quite some length to secure tenants, it is no wonder that rents are coming under fire. Roberts says: “Prime rents have slipped back to £5.75 per sq ft over the first six months of the year, while secondary rents have been more responsive to the economic slowdown, with good quality second-hand rents falling by some ten per cent over the past 12 months. Poor quality second-hand rents have eased back by 17.6 per cent in the region.”
Good second-hand space that is due to come on to the market next spring includes a 275,000 sq ft building at Goodman’s Royal Oak complex in Daventry, which is being vacated by Diageo. The property has 9.4m eaves, 15 dock levellers and level access doors which could be extended, as well as heating, lighting and sprinkler provision. It is being marketed by North Rae Sanders at a rent of £4 per sq ft.
Another building shortly due to become available is Hydro at Magna Park. Primark previously occupied the three year old building following the destruction of its previous facility by fire in November 2005. Hydro is surplus to requirements now that Primark has taken a larger distribution warehouse in Thrapston.
Hydro totals 422,784 sq ft and has 15m eaves. It incorporates substantial features from 36 dock level doors and a large secure yard up to 92m deep. It is an eco-friendly building with reduced running costs, one of the first in the country to incorporate Gazeley’s Eco Template in 2005. It is being marketed by North Rae Sanders and CB Richard Ellis on a short or long-term basis. The property was originally let to TNT/Primark at a rent of £5.25 per sq ft.
With no new development being brought forward property agents warn that the era of soft deals could end rather more quickly than tenants might think. James Chasen of Lambert Smith Hampton explains: “While there are no new developments being constructed, this will ultimately put pressure on availability as existing stock dries up.
“With the lead times associated with commercial property development we could be looking at a minimum period of another two years before any new schemes come to the market.”
Rae agrees: “The best deals will be available for the next six months then after that, unless there is new stock, supply will dwindle and then you will see rents start to rise.”
David Binks of Cushman & Wakefield says: “Over time the speculative space will get taken up particularly in the prime areas. Softer deals will dry up and in some locations it will be less than a year before they disappear altogether.”
Matthew Smith of King Sturge explains: “The distribution of supply is irregular and certain locations such as Nottingham have limited good quality product and latent demand; therefore it is better placed to maintain rent levels.”
While developers may be a long way off developing speculatively they are happy to settle for D&B when they can get it – although it has to be pointed out that there is almost unanimous consensus from the property pundits that unless you are looking for something totally bespoke, a D&B deal is almost always more likely to be more expensive than securing a unit already built.
Andrew Jackson says it is probably going to be at least ten per cent more expensive, taking into account the higher construction costs and the softening of yields in recent times, making it impossible for developers to keep to their margins and turn a profit on a site bought a year or so ago when land prices were, in some cases, 50 per cent higher than they are today.
The developers of Gateway Peterborough are holding out for D&B and are not even putting in infrastructure works to the 130-acre site until they have a tenant lined up. Jackson says the team of Goodman, Frenbury and Simons has a good enough track record of deliverability that this is not required and that is why he is able to actively market the site. Indeed it would only take a short spur off the Fletton Parkway roundabout to open the site in Peterborough.
Goodman has recently bought into the development, which can accommodate 1.8 million sq ft in buildings from 200,000 sq ft to 700,000 sq ft. Joint letting agents are North Rae Sanders, Savills and Bidwells.
Would that it were so simple for Gazeley’s Magna Park scheme on the eastern side of Peterborough, which has yet to secure planning. The site has stalled somewhat with problems surrounding the current economic climate and the construction of the Stanground Bypass, which would open the site for development.
Persimmon Homes, which was granted permission to build 1,500 homes in Stanground on the proviso it paid and built the bypass, called a halt to work citing the difficult financial conditions.
Peterborough council used emergency powers to push through a £1m payment to Persimmon Homes, to pay for essential, additional structural works on the road and get the project moving, and to save the Gazeley proposal that could bring thousands of jobs to the area. Gazeley has yet to formally submit plans for the scheme though it had been due to at the end of last year before Persimmon stopped construction on the bypass.
Peterborough council is not the only local authority to be trying to push forward plans for employment through the injection of public funds to kick-start works on potential employment land. Sean Bremner of Lambert Smith Hampton says the success of developments such as Brook Park in Shirebrook, where Sports World has developed 600,000 sq ft of a consented 1.3 million sq ft NDC, would not have come about without significant public expenditure.