Rents ready for take-off?

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In the context of the logistics business, West London is a pivotal location serving both the huge demand of the capital city and also – via Heathrow – the international flow of goods which are either arriving in or departing from the UK. Heathrow remains a major driver for the logistics business in this location and that impetus looks set to increase as the airport is developed further.

The airport’s Terminal 5 will become operational from 2007 and can potentially provide a 50% increase in passenger numbers to 90-95 million per year. The important fact about this for the logistics business is that there will be a corresponding increase in belly-hold cargo carrying provision. During the past ten years Heathrow has consistently handled more overall freight each year than all the other UK airports put together and more than 90% of this freight is carried in the belly-hold of passenger planes.

In addition, instead of the current segregated use, “Mixed-mode” take-off and landing use of the two existing runways at Heathrow could also increase movements by a further 15% (an additional 20 million passengers per year). In the longer term, the development of a third runway – potentially scheduled for between 2015 and 2020 – and a possible Terminal 6 would substantially increase aircraft movements from the present limit of 480,000 (551,000 with mixed-mode on the two existing runways) to 655,000 per year.

Given this unique strategic position, it is perhaps no surprise that in recent years the property markets of West London and Heathrow were not as adversely affected by economic slowdowns to the same extent as some other logistics locations in the UK. Demand from occupiers has remained steady and the availability of space has risen more slowly than in the South-east of England as a whole.

Green Belt constraints on further land releases in and around Heathrow limits the potential for new property supply and, as a consequence, logistics operators looking for facilities in West London and Heathrow have to pay some of the highest rents in the UK.

However, that is not to say that there are not good deals to be had. Occupiers have been looking to negotiate deals which match their property requirements to their business planning. Accordingly, we have found that logistics companies have been drawn to the flexible leasing opportunities among the 558,000sq m-plus (6 million sq ft-plus) of property that we have within the West London and Heathrow markets.

The nature of the logistics business where operators have to react quickly to new contracts mean they are looking for property to reflect their immediate operational needs. Consequently, the “traditional” 25-year lease with five-yearly reviews does not always suit their needs.

This need to respond dynamically to the logistics sector is illustrated by a recent deal that we did with Premier Moves, which was occupying space at our Great Cambridge Industrial Estate in Enfield when it started to look for new accommodation. The company was looking at a range of locations when it won a major contract from BSkyB at Brentford, and the search for space became focused within this area. The solution to Premier Moves’ need for space was provided by Unit 2 at our West Cross Industrial Park in Brentford, which it took on a ten-year lease at a rent of £9.38 per sq ft with an option to break the lease at the end of the fifth year.

Another recent transaction which shows the kind of deals being done took place at the Victoria Industrial Estate in Park Royal, London. Glo Logistic took 1,399sq m (15,038sq ft) in three units on a ten-year lease with six months’ rent-free at an initial rent of £154,140pa (£10.25 per sq ft).

Looking ahead, there is no sign of a glut of new space coming on to the market. Whereas other areas of the property market may be oversupplied this cannot be said of the distribution sector in West London. Indeed some developers – ourselves included – are now proceeding with speculative new development.

The message for occupiers is straightforward. There is a good choice of property at present and good, flexible deals can be had. However, given the new impetus in the economy, future expansion at Heathrow and the continuing need for logistics operators to be located in West London, it looks as if the property markets that serve these locations will tighten in the medium-term and upward pressure on rents is now occurring. n

Rob Skelston is director of Lettings & Development at Brixton plc. Tel: 0207 399 4516.

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