The past six months has seen little, if no, change within the West of Scotland distribution and industrial property market. Few requirements have come to the market and those that have are from retail distribution companies looking for economic space on extremely flexible leases. But there have been few requirements from the manufacturing sector, which historically has taken large volumes of space for long terms.
For the past year occupiers have favoured feuhold* options, largely as a result of low interest rates and also better quality stock becoming available for sale due to companies downsizing and relocating. The recent increase in interest rates and the mooted possibility of rates reaching 5% by 2005 may slow this sector. Any reduction in demand for feuhold property will hopefully lead to stronger demand in the leasing market.
The most notable deals have been at Westway, one of Scotland’s largest and most secure distribution parks, where flexible leases and economic rents have been secured. Smurfit has leased 6,975sq m and more recently Lambertons Engineering has leased 2,511sq m, the latter at £2.50 per sq ft.
Other significant deals include that of PRG Powerhouse, a subsidiary of Pacific Retail Group, which has taken over in excess of 100 retail units and has leased 1,628sq m of distribution space in Bellshill at £5 per sq ft and, within the manufacturing sector, the sale of Fountain Crescent on Inchinnan. Extending 60,000ft, the Minbbea facility was sold to TRS for £2.6M. The majority of activity in the market has been for units of 930sq m and below, largely from indigenous companies. The market is likely to remain the same in 2004 with any large requirements being contract driven, requiring leases to be tailored to distribution contracts and at extremely competitive rental levels.
There has been a lack of speculative development. Historically the public sector has provided the catalyst for this side of the market. Several years ago there was a shift to private developers taking over this role, however low take-up levels has dampened the desire by developers to speculatively develop. It is likely that any increase in market activity will be seen in the second-hand stock, which will hopefully give developers the confidence to speculatively develop.
The market in East Central Scotland has remained slow during 2003, mainly due to the reduction in tenant demand. However, compared to 2002, deals are now starting to happen in the medium-sized market that had been slow for 12 to 18 months. Little speculative development is occurring in the Lothians area, and development has focused on the refurbishment of existing accommodation.
Demand has been slow and the smaller market for below 1,395sq m, which until now has been active, has now been affected. The market for units between 1,395sq m and 2,790sq m has shown signs of activity with a number of deals occurring. Significant deals include Welcome Car Finance taking 1,527sq m at Interchange Park, Newbridge at £5.50 per sq ft, and Telewest taking 2,790sq m at Kingsthorne Park, Houstoun, Livingston at £4.75 per sq ft.
Although deals are starting to occur, these are often on more flexible terms than have previously been seen. Any significant growth in rents is not likely to happen until the current oversupply is taken up.
Until tenant demand starts to pick up and begins to take up the current oversupply of stock, it is unlikely that rents will increase and speculative development will commence. For occupiers it is still a good time to be going into the market as flexible leases and packages are obtainable.
John Whitehurst is managing director of Westway. Tel: 0207 323 5250.
* Under Scottish law, feu is a right to the use of land in return for a fixed annual payment.