This year began with enquiry levels showing improvement throughout the first half of 2004 and while these tailed off in the summer months, recent signs point to renewed activity. There remained a high level of demand for smaller buildings, sub 930sq m. Yet, 2004 saw an improvement in enquiries for larger units of 4,650sq m or more, albeit some of this has still to be translated to actual take-up.
Strong demand also continued for feuhold properties across all size ranges but activity has been largely focused on smaller, second-hand buildings. Despite the desire for purchase opportunities, there remained a significant gap between the prices being paid for second-hand buildings and, in the few instances where available, the prices being quoted for modern/new build units.
The distribution sector continued to make up the bulk of enquiries for and take-up of larger buildings, but there remained a considerable amount of caution among occupiers. Demand was led by retailers or retail-related deals with the likes of Morrisons, IKEA, Amazon, Argos/TDG and Wolesley all having had large requirements during 2004.
Distribution still showed positive growth and this may well prove an ongoing feature given that a large proportion of manufacturing now takes place overseas, and the goods produced there need to be distributed throughout the UK. Another factor continuing from recent years was the level of distribution enquiries seeking short-term leases to marry in with contract periods.
Having shown signs of recovery since January 2002, the UK’s manufacturing sector seemed to wane again after official Office of National Statistics figures showed output in August down for the third consecutive month for the first time in 18 months. The figures for August revealed a fall of 0.8% compared with the previous month against expectations of a modest 0.3% increase, and was the biggest monthly decline since October 2002.
These figures were the latest in a series of surveys, suggesting that higher UK borrowing costs, rising oil prices and slower than anticipated US growth were taking effect. As a result, manufacturing requirement numbers saw little improvement and most activity came from indigenous companies, with very few new inward investment opportunities reported.
Scottish Property Network (SPN) statistics show a slight upturn in the first quarter, but the supply of available industrial floorspace in Scotland continued to decline. At the end of June 2004, available floorspace totalled 2.187 million sq m, a fall of 7% from June 2003, but despite that decline, availability was still 6% above the five-year average.
Reflecting the trend towards the supply of larger floorspace, the actual number of available units (1,971) was 6% below the five-year average.
This year’s figures witnessed the return of the former Chunghwa Picture Tubes facility (450,000sq ft) at Eurocentral, Lanarkshire. Bought by Tritax Assets, the property being redeveloped with the building sub-divided and offered for short-term, flexible periods. At Hillington and Cambuslang Investment Park, where four and five units were available at the start of 2003, the perceived over supply has been reduced with three units having been taken up at Hillington and two at Cambuslang, where a third is “under offer”.
Caledonian Land at Hillington and Wilson Bowden at Cambuslang are planning new speculative phases. Two new units of 3,255sq m and 2,325sq m are under construction at Hillington and will be available next summer.
These are rare exceptions. As units conceived in the last cycle of speculative development are taken up in areas such as Inchinnan, in addition to the low level new build in 2003, there could well be a shortage of new stock in certain parts of the country over the next 12 to 24 months.
Another positive feature of 2004 was the overall reduction in the total amount of good quality second-hand accommodation coming back to the market. While this type of space is suitable for many occupiers (apart from the large 3PLs) compromise must be made on overall specification needs by the occupier. This can be offset against the greater lease flexibility on offer with second-hand buildings.
Headline rents for new industrial buildings in Scotland, in common with most UK locations, have remained static. However, net rents have reduced, particularly at off-prime sites where increased incentives have been offered. The there is occupier pressure for more flexible lease lengths, either through shorter fixed periods or tenant break options. Reductions in lease lengths have led to increases in rent, but the location and/or quality will determine this point.
The main exception to these trends is the large warehouse market, where a shortage of good sites in popular locations and the necessity for design and build is helping to keep lease packages, including rent and lease lengths, strong despite only a few transactions this year. Industrial land remains a relatively scarce resource, particularly for large development platforms, and land values continued to increase over the past two or three years. However while demand from firms seeking opportunities for self build/owner occupation remained strong, developers remained reluctant to sell. Some have indicated that they would be willing to off-load surplus land from their sites but the quoting prices reflect their lost development profit and occupiers have been dissuaded.
The trend south of the border of occupiers building their own sheds have not been witnessed to the same extent in Scotland, with Aldi a rare example at M8’s J4 in West Lothian.
The M74 motorway extension and accompanying compulsory purchase programme should take effect in 2005. Many affected occupiers appear reluctant to relocate outside of Glasgow and a further complication could arise from the number of companies who are currently owner occupiers and who wish to continue as owners rather than tenants in new locations. There are few opportunities for owner occupation either within or around Glasgow.
With little new speculative build under way or planned, and with few signals of large units coming back to the market, supply levels should fall again. If the enquiries now on the table are anything to go by, 2005 looks like being a pretty good year. n