With high rents, high land prices and high demand could speculative development of big sheds be round the corner?
Could the speculative development of larger warehouses be on the cards in West London? Certainly there seems to be a need for it on the basis that there is pent up demand and virtually no Grade A space available to satisfy it.
According to Jones Lang LaSalle’s latest figures for the Western Corridor Industrial & Distribution Market as at mid-2012 the total amount of available space in the Western Corridor stood at 13.1 million sq ft, three per cent up on the end of December 2011; however the increase in supply is attributable to a rise in Grade C space which shot up 76 per cent compared with the end of 2011. This increase is partly the flipside of robust take-up, as companies upgrade to better quality units at lease expiries or when break options arise.
In stark contrast to the increase in Grade C availability, Grade A stock fell 31 per cent over the first six months of 2012.
This dramatic fall, says Len Rosso of Colliers, is due to the fact that there has been continued take up coupled with almost no speculative development in the last four years.
Bonnie Minshull of Savills notes that in the Heathrow market alone there is only 2.89 million sq ft available in Grade A and B stock and of that only 630,000 sq ft is Grade A.
Lot under offer
“There is a lot under offer as well,” she says, “we have 250,000 sq ft in solicitors’ hands so far this quarter with some 1 million sq ft already taken up this year.”
Rosso notes that for the market immediately around Heathrow take-up excluding build-to-suit is in the region of 700-800,000 sq ft a year. “Take-up has been quite steady over the last three years with the wider Heathrow area reaching close to 1 million sq ft of take-up both in 2010 and 2011. While annual take-up in 2012 may be marginally down on 2011, vacancy is continuing to fall with positive absorption being driven as much by lack of new supply as by demand.”
Looking at the whole market, Jon Sleeman of Jones Lang LaSalle says: “A total of 2.6 million sq ft was taken up in the first half of 2012, 43 per cent above the average over the past 10 years. This followed an exceptionally strong 2011 when the Western Corridor posted its highest level of take-up since Jones Lang LaSalle’s records began in 1995.
“The availability of good quality Grade A industrial and warehouse floor space fell by 31 per cent in the year to mid-2012 to stand at 1 million sq ft, its lowest level in 13 years.”
Big sheds are also in short supply both Grade A and Grade B stock. Dominic White of Savills says: “You can count the number of available big sheds over 100,000 sq ft on one hand.”
These include AIPUT’s South Cargo Centre which boasts, 112,000 sq ft of warehousing space and 9,450 sq ft of offices over two storeys. It has a 12m eaves height, a 50kn/sqm floor loading, eight dock and two level access doors as well as 90 car parking spaces. It is situated to the south of Heathrow Airport, approximately 2.9 miles from the Cargo Terminal. The site is accessed via the A30 Great South West Road (dual carriageway) and the A312, The Causeway. Letting agents are Jones Lang LaSalle, Dowley Turner Real Estate and Vail Williams.
In Park Royal there is Standard Life and Canmoor’s Thunder building which totals 107,772 sq ft. The adjoining building, Lightning, totalling 63,862 sq ft is thought to be under offer to Speciality Drinks on a freehold basis at £150 per sq ft.
Canmoor bought the 5.2-acre site in Park Royal in 2008 from drinks company Diageo. The £25 million scheme provided two buildings with an eaves height of 12.05m as well as substantial office content. Thunder, the larger of the two units has five dock and four level access doors while Lightning has three dock and two level access doors.
Rainsford Road is being extended to link to the A40 Western Avenue, providing the scheme with good access to the M40/M25 motorways and central London. Joint letting agents are Gerald Eve, Dowley Turner Real Estate and CBRE.
Lack of supply
As a consequence of the lack of supply, says Gus Haslam of Jones Lang LaSalle, there have been a large number of pre-lets and D&B deals.
One of the most recent saw global air services provider dnata signing a 15 year pre-let agreement with the Scottish Widows Investment Partnership for a 141,500 sq ft cargo warehouse hub at London Heathrow Airport.
The new development at the former Blackburn & Court Farm Estate on Northumberland Road is held by SWIP’s Airport Industrial Property Unit Trust – a specialist owner and manager of airport related industrial warehouses.
The pre-let which has been secured off a headline rent of £16 per sq ft is the first phase of the development of the park. There is the potential for a further warehouse facility of 70,000 sq ft that could be developed on the remaining 3.5 acres.
AIPUT was represented by Canmoor Developments, Dowley Turner Real Estate and Dundas & Wilson. dnata was represented by Lambert Smith Hampton and Wragge & Co.
Another D&B deal saw freight forwarder Toll take a 70,000 sq ft warehouse at SEGRO’s Southern Approach on a 15 year lease at a headline rent of £12 per sq ft. Letting agents are De Souza, Doherty Baines and Savills.
Andy Hall of Knight Frank notes: “As well as an increase in the number of D&B deals being secured, a shortage of decent quality stock has also meant a hardening of rents and incentives.”
According to Jones Lang LaSalle’s research the average headline rent remained broadly unchanged with the exception of the dnata deal which was secured off a headline rent of £16 per sq ft. Everyone agrees this was an exceptional deal for the area and the general tone of achievable prime rents for buildings close to the Cargo Terminal in Heathrow are mainly in the region of £14-15 per sq ft compared to £14 per sq ft a year ago.
Interestingly Grade B space in Park Royal is now marginally more expensive than in Heathrow probably due to the fact that there isn’t much Grade B space available in Heathrow. A recent letting at Mitre Bridge Industrial Park saw a high headline rent of £13.50 per sq ft on a 15 year lease with a ten year break. Jonjo Lyles of BNP Paribas says: “That deal reflects just how strong the Park Royal market has become.”
Rents in general are averaging £13.25 per sq ft for Grade A space at Park Royal with lower incentives also on offer there. Assuming a five year lease, occupiers can expect to secure incentives of around nine months’ rent free in Park Royal with evidence of this further tightening while in Heathrow occupiers are agreeing a five year lease are still able to achieve 12 months’ rent free.
Sleeman notes: “The market balance in the Western Corridor is moving slowly in favour of landlords and away from occupiers, as highlighted, in particular, by the very low level of good quality available stock. We expect this market to lead the recovery in rents in the industrial sector and to see more speculative development over the next 12 months.”
Indeed it is not surprising to find that speculative development is going ahead if only in a small way at present. At September 2012 there were five schemes under construction along the Western Corridor totalling around 300,000 sq ft.
The largest of these is SWIP and Goya’s Central Park in Park Royal which totals 161,372 sq ft in nine units from 8,000 – 30,000 sq ft. Colliers, which is advising, says there is a good level of interest.
There is also SEGRO’s Tudor Estate scheme at Park Royal totalling 34,432 sq ft. One unit of 9,795 sq ft was pre-let on a 15 year lease in July to Warmup, an electric floor heating brand, while the other 24,637 sq ft unit is due for completion shortly. Jones Lang LaSalle, Doherty Baines and CBRE have been appointed to market the property which fronts Abbey Road.
Other speculative schemes include Volume and CBREGI’s 58,523 sq ft Nexus scheme in Heathrow. The scheme is made up of five units from 8,275 sq ft to 20,800 sq ft. The warehousing benefits from 8.5m eaves, a 50 kN/sq m floor loading capacity as well as surface level loading doors. Letting agents are Jones Lang LaSalle and Altus Edwin Hill.
Kier is going ahead with its 57,600 sq ft speculative scheme at the Western International Market offering units from 4,500 – 28,000 sq ft. Letting agents are Knight Frank and Cushman & Wakefield.
There are some developers considering larger speculative development in the region. SEGRO is to go ahead with the speculative development of the first phase of its Origin distribution warehouse site in Park Royal, subject to securing planning.
The development will cover 160,000 sq ft in three stand-alone buildings of 36,000 sq ft, 53,000 sq ft and 69,000 sq ft, all with secure yards.
All of the units will be highly sustainable and constructed to a BREEAM ‘excellent’ standard.
The planning decision is expected in February 2013 and once approved, construction on the speculative units is expected to commence in March 2013, with completion of this phase in late Autumn 2013.
Letting agents are CBRE, Doherty Baines and Jones Lang LaSalle.
Such is demand though that some agents reckon the development is likely to be pre-let before development is completed. According to Lyles, who has been marketing a site in Uxbridge, demand is taking on new proportions from developers as well as local occupiers seeking freeholds.
“We have had more than a dozen seeking best bids on the site when we were only expecting a handful.”
The 7.21 acre Trimite site on Arundel Road is being marketed by BNP Paribas for the LPA Receiver.
Melinda Cross of Jones Lang LaSalle notes: “There is a lot of activity from developers and owner occupiers for freehold properties. The market is going quite well possibly due to the lack of properties for lease. Many local occupiers are able to fund freehold acquisitions although whereas before the recession occupiers could typically purchase premises with deposits of 10-15 per cent banks are generally now looking for twice this amount before being prepared to make advances.”
Chancerygate’s 4-40 Link development in Southall is a good example of a freehold scheme that has attracted good demand. Indeed, the 80,000 sq ft 12-unit scheme is now more than 50 per cent sold. Quoting prices on the smaller units (c.2,000 sq ft) are £150 per sq ft and, in general, these have sold close to £140 per sq ft. The larger units (c.10,000 – 15,000 sq ft) are available at £140 per sq ft and are selling close to this price.
While not all developers will jump on the speculative band wagon there is enough land with planning permission to satisfy those occupiers who can wait for D&B although rent levels and incentives will be robust.
Schemes include the remaining land at SEGRO’s Origin site in Park Royal which could accommodate up to 200,000 sq ft.
SEGRO also has a 3.44 acre site in Uxbridge on the Riverside Estate which could take up to 75,00 sq ft subject to planning. Letting agents are Jones Lang LaSalle and Colliers.
Developer Canmoor has a 5 acre site off the Bath Road in Heathrow known as Vortex, which could accommodate up to 150,000 sq ft of warehousing. It is available through letting agents Colliers and Doherty Baines.
ProLogis has the remainder of its ProLogis Park Heathrow scheme roughly totalling 9 acres where it has permission for two buildings of 54,197 sq ft and 109,319 sq ft. The smaller unit known as DC5 would have 10 m eaves, eight dock and two level access doors and a 50kn/sq m floor loading while the larger unit, known as DC6, would have 12m eaves, 10 dock and three level access doors. Letting agents are Dowley Turner Real Estate and Savills.