Peripheral Vision

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Everything that has happened or is happening in the logistics property market shows up the UK as an ignoble backwater of just 60 million people on the fringe of the giant agglomeration that is Europe. To the corporate chiefs of the global economy the ‘Ultimate Isles’ are merely a scalp for their collections.

When Macquarie Goodman paid €492 million for Solihull-based Rosemound, the deal did not put the UK on the map so much as to show what a minnow the country now is. The Rosemound deal was an afterthought to the Australian developer giant’s expansion into continental Europe. It follows the apparently identically-priced deal where ProLogis paid nearly €439 million to buy Parkridge to get itself a UK industrial land bank that can support 1.3 million sq m of new development. Big deals among UK developers they may be but Rosemound’s development pipeline figure of 1.8 million sq m has to compare to, for example, ProLogis’s worldwide ownership and development pipeline of 39.2 million sq m.

Sure, the UK has big occupier deals to prop it up.’s announcement that Macquarie Goodman (again) is building an 800,000 sq ft distribution centre on 33 acre in the Neath Port Talbot County Borough Council area shows that there is a healthy market for logistics property. The Port Talbot centre adds to’s distribution centres in Scotland, at Glenrothes and Gourock, as well as one in England at Marston Gate near Milton Keynes.

In addition, Screwfix Direct, part of the Kingfisher group, has leased a distribution centre of more than 50,000 sq m at ProLogis Park, Stafford. But the UK is still a local market.

The largest port in the EU is Rotterdam, nearly 20 per cent larger than Hamburg, its nearest rival. Felixstowe, the UK’s largest container port, comes in at seventh, below Algeciras in Spain. Similarly, Heathrow comes third behind Frankfurt Main and Amsterdam Schiphol for air freight.

And the industry has many other reasons to congratulate itself. With some 150 million sq m of warehouse stock, the UK is one of the largest logistics markets in Europe. Of this, around 22 per cent of space is in London and the South East and about the same proportion in the Midlands regions. Nationally, the total level of available industrial floorspace stood at 20.33 million sq m at the end of 2006. And King Sturge reckons demand for distribution space has reached a new peak.

Thanks to confidence by developers in the speculative building market, coupled with an appetite by retailers for bigger and better distribution centres, the amount of available industrial floorspace in the UK is now at its highest since 1985. In the last 12 months alone, new available floorspace in the West Midlands has increased by 80,000 sq m – a rise of almost 46 per cent. King Sturge believes that demand for distribution property will continue unabated for at least the next six months.

The heavy hitter among the UK’s regional markets is the West Midlands. According to King Sturge, available industrial floorspace in the West Midlands now stands at 2.58 million sq m, more than 33 per cent of which, 855,000 sq m, is in large buildings. The West Midlands is also the region with the highest proportion of speculative floorspace in the UK, accounting for 17.9 per cent. Prime rents have remained static in the West Midlands over the last six months, with Solihull properties attracting €98.49 per sq m, Birmingham €90.60 – €94.55 per sq m and the Black Country €82.69 per sq m.

Meanwhile, there has also been a significant increase in the level of speculative development in the East Midlands, where 132,746 sq m is now under construction. Just four large distribution schemes account for almost three-quarters of the total. The largest project underway in the East Midlands is at Kettering, where ProLogis is developing a single unit of 37,160 sq m. ProLogis is also on site in Corby constructing the Corby Eurohub.

Distribution is the darling of the industrial subsectors. AtisReal says that, on average, logistics properties (B8) are on the market for 169 days with a range of 89 days in the South West to 220 days in the West Midlands. By comparison light industrial (B1c) space is on the market an average of 323 days with a range of 229 days in Greater London to 378 days in Yorkshire & Humberside.

Perhaps Napoleon was right about the local love of shopkeeping. Much of the current demand for distribution/warehouse space is coming from major retailers looking for their own dedicated facilities, or from third-party logistics companies acting on behalf of their own retail clients.

What makes Britain truly great in its small way is the UK’s advanced system of security of tenure. Along with generally increasing capital prices, that’s the main reason the world is flying from their local airports first to London to buy property. If English homes are castles, UK distribution sheds are rich enough in yield and potential yield terms to be called palaces.

Across Europe, investment in the industrial and logistics sector is dominated by activity in France and the UK. In 2005, according to CBRE, this made up some 86 per cent of total investment turnover in the sector in Western Europe.

Overall the market is becoming more international. Despite the concentration of turnover in the UK and France, yields are becoming more consistent across countries. The prime yields in most major countries are now closer than has been the case.

This is despite some considerable difference in the structure of the two logistics markets. In the UK roughly 80 per cent of transportation is outsourced, along with 70 per cent of warehousing and some 22 per cent of inventory management. In France, by comparison, the rate of outsourcing for transport is estimated at over 70 per cent, but is still less than 50 per cent for warehousing and only 10 per cent for inventory management.

Market advantages
Cushman & Wakefield says that, within both France and the UK, the freehold market is both widespread and liquid. Logistics property is of  particular interest to investors because of the larger lot sizes it offers compared to other industrial property. The fact that logistics property is generally let to a single, well established tenant is also an advantage for many groups of investor, simplifying management and apparently offering better covenant strength than is available in other types of industrial property.

CBRE says that, for many investors in the UK, the potential for capital value growth is a significant attraction of the industrial and logistics sector. Traditionally, yields for industrial property have been much higher than for other sectors. However, this premium has been steadily eroded over time. In the UK, for example, the yield for well-let modern logistics units is on a par with (and in some cases below) that for well-let offices in provincial cities. Whilst this yield convergence has already occurred in many markets, investors still see potential for yields to fall, relative to other sectors, elsewhere. In what is undoubtedly an aggressive real estate investment market, the opportunities for such windfall gains are limited and are, therefore, attracting many investors to the sector.

Cushman & Wakefield research goes on to show that the industrial market has witnessed major yield compression over the course of last year, with prime yields falling to 5.6 per cent, outstripping both the retail and office sectors. C&W puts this down to a combination of high liquidity and a lack of quality stock.

Investors maintained pressure on the investment market over the final quarter of last year, with yields continuing to edge downwards. This represents a further record low for the sector, although the rate of compression has eased significantly over the past six months, reflecting both a perception that yields are reaching their natural floor and the fact that more and larger distribution units have been brought to market.

Yield compression
Yield compression has remained focused most notably in the North West and Yorkshire and Humberside. Investors put the usually less attractive areas of the North and Wales on their shopping lists leading to the greatest declines in yields as these regions played catch up with the others.

One reason for lower yields is the flexibility you have to display if you are a 3PL. Landlords complain that long leases are hard to get from 3PLs – but at least they get leases, which provide the basis for investment. In the office market, those landlords are competing with occupiers for buildings when they come on to the market because, with interest rates low enough to make it worth their while, what’s the point of lining your landlord’s pocket when you could be putting it under your own mattress?

The bad news for occupiers is that a strong investment market puts the spotlight on rents and how to increase them. Rents will increase, despite weakening economic performance. Lambert Smith Hampton expects them to rise across the UK by 2.8 per cent in the medium term – during 2007.

The security of tenure system is the most significantly innovative financial product the UK property industry has produced in the past 200 years. Like other countries looking to Westminster as the mother of all Parliaments, other countries would like to adopt it because of the boost it provides to their economies. Too many of them are stuck with systems based on the Napoleonic Code.

Planners who Restrict B8 may be Damaging Economy
Planning’s role as a thorn in the side of honest, cheerful property development is nowhere clearer than in the logistics property industry. UK planners have long operated an apartheid system, welcoming the manufacturing industries that are trying to flee eastwards yet shunning the distribution businesses for not providing enough ‘employment’. Now the distribution property industry has produced research to show how wrong those planners are. The supply chain industry is a major employer according to AtisReal and to GVA.

AtisReal showed that the quality of B8 jobs is better than B1c, that the differential between logistics and manufacturing in terms of job creation is much lower than many perceive and that, over a typical five- year lease, the overall economic contribution of B8 is higher than B1c. Both AtisReal’s research and a new report by GVA showed that successful regeneration combines supply and demand, B8 may provide fewer jobs but they tend to be higher earning and available and planners who restrict B8 may be damaging local economies.

According to AtisReal, the recent review of the Use Classes Order could lead to subdivision of the B8 use class. The disadvantage of this is that it gives planners the opportunity to be more prescriptive.

AtisReal suggests a more immediate and constructive change would be the acceptance by LPAs that specific land allocations for B8 development should be more widely made and, unless specifically justified on impact grounds, planners should stop prescribing maximum percentages of B8 floor space in mixed use parks and set aside land for B8.

Sponsors of these reports include ProLogis, Gazeley, Astral, Advantage West Midlands, DHL Exel Supply Chain and Sainsbury’s. With last year’s Kate Barker review on planning the first shot in the Treasury’s battle to reform the planning system, perhaps these organisations have joined the battle late. Still – better to have joined now than not at all.

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