Why has there been such a marked change in attitude towards distribution warehouse provision? Where once developers held out for a pre-let they are now falling over themselves to build speculatively and all to the advantage of the occupier – we’ve never had it so good.
There are several factors involved, the most basic being that there is a huge demand to take the space once it is built. Chip Mitton of Edwin Hill says: “There’s still good level of demand from all sectors and that should give the speculative development sector the confidence to continue building to meet that demand.”
According to King Sturge: “The take-up of logistics facilities developed on a speculative basis continued to rise to unprecedented levels in 2006, accounting for 36.5 per cent of total floor space taken up in new logistics units of 100,000 sq ft and over. This took place in 18 transactions totalling 5,105,843 sq ft compared with an annual average of just 11.6 per cent over the past 10 years.
Atisreal’s Steve Williams points out that in more than 85 per cent of the deals done in the South East in the last two years it was the developers, which had gone down the speculative route who secured the big occupiers.
Nowadays a lot of occupiers prefer securing space in this way. Neil Starkie of Savills says: “Many 3PLs have a need for it [space]now and prefer to take buildings ‘off the shelf’.”
David Gladman of Gladman Developments is well aware of this and believes that this is the best option for occupiers who need new accommodation. The developer only builds speculatively.
At present the developer has several key developments underway. These include: Cosmic Park, at Sherburn-in-Elmet, West Yorkshire, four miles from junction 42 of the A1 (M), at 1.6 million sq ft the UK’s largest speculative industrial development; The Vault, a 618,839 sq ft distribution warehouse at Liverpool International Business Park, which is ready for occupier fit out; and Scotland’s largest speculative industrial development, a 655,000 sq ft warehouse complex on a 33.5 acre site at J4 M8 Distribution Park in the Central Belt, known as MAX.
Gladman Developments is also building large speculative units at Lymedale Business Park in Newcastle-under-Lyme in Staffordshire (300,000 sq ft) and at Manor Park on the A558, close to junction 11 of the M56, near Runcorn, Cheshire (375,000 sq ft)
It also plans a speculative 410,000 sq ft industrial and distribution development on a 25-acre site at Tankersley near Barnsley in South Yorkshire.
“In today’s fast moving business environment, when retail market conditions change quickly and logistics companies often have only few months to source the facilities to fulfil a new contract, companies cannot wait for buildings to be specially built for them,” says Gladman.
Julian Meredith of Chase Commercial agrees: “There will always be good demand for speculative industrial development from contract-led occupiers. Due to the nature of their business, they typically require warehouses for immediate occupation and are rarely prepared to wait circa 12 months for a bespoke building to be developed.”
Steve Williams says: “Homebase took a 350,000 sq ft unit at ProLogis Park Wellingborough because it was already there. If the site had been just for D&B Homebase would not have had enough time to meet its deadlines.”
In a similar instance Handleman UK took Arlington and Barwood’s 274,700 sq ft cross-docked distribution centre, Big Sam, at Wingates Industrial Estate in Bolton.
David Rowley, of Savills, says: “The letting was agreed just three months after practical completion. The specification of the site, coupled with its close proximity to the M61, meant that it met Handleman’s criteria and [most importantly]satisfied the company’s requirement to be operational in early 2007.”
Arlington and Barwood were advised by Savills and M3. King Sturge represented Handleman.
Lisa Fitch of Atisreal adds: “Even with the ‘quick-build’ processes of Gazeley and ProLogis, folks like the 3PL’s prefer existing when bidding to alleviate the risk factors and make their offering more attractive. Major occupiers in expansion mode are also tending toward the want it now mind-set so as to more rapidly implement their strategies.”
As well as demand and inclination from the occupier there is till one factor that tips the balance. Finance.
According to Starkie: “Access to funds has played a big part bringing more investors to the market than has previously been the case.”
Richard Smith of Opus Land agrees and adds: “The principal funds may be few, but they continue to invest significant sums with no sign of reduced interest.” In fact there is pressure form the property industry to invest more in the sector as a whole but there has been a lack of supply.
Allan Wilson of King Sturge says that with the sheer weight of money looking for a home it should have come as no surprise that investors should look at funding speculative development.
“Indeed, with investment yields at an all-time low, the additional returns from taking some speculative risk are looking more attractive by the day.
“It is not the traditional “profit erosion” structures that are proving attractive to investors but rather structures that give investors greater exposure to the associated letting risks and a greater share of the developer’s profit. This arrangement also seems to suit the majority of developers as the funder is essentially carrying the burden of risk, allowing the developer to focus on procuring the building.”
There have been some notable pre-funding deals secured this way including the forward sale of HelioSlough’s 750,000 sq ft cross docked unit at Nimbus Park, Doncaster to CBRE Investors.
Research by King Sturge indicates that there are 72 new speculative schemes over 100,000 sq ft immediately available or under construction at the end of last year. The total floor space equates to 18.2 million sq ft with 49 of the schemes equating to 12,946,513 sq ft immediately available and 23 totalling 5,272,864 sq ft under construction.
Wilson warns: “As the volume of speculative development continues, in part fuelled by continued investor demand, the number of suitable sites in prime locations is diminishing.
“The result is that land values in such locations are increasing to levels that can no longer support such deals.”
According to King Sturge several regions across the country have experienced an increase in land values over the last year.
Scotland saw the largest increase in land values over the last year, rising from £200,000 to £300,000 per acre, representing an increase of 50 per cent while the East Midlands has seen significant increase in land values, up from £350,000 to £450,000 per acre (28.6 per cent). Land values have also notably increased in the North West, from £300,000 to £350,000 per acre (16.7 per cent) and in the South West, from £350,000 to £400,000 per acre (14.3 per cent), with the South East (excluding Heathrow) and Wales showing smaller increases of 13.6 per cent and 12.5 per cent respectively.
Luckily this has not been the case in every region. King Sturge reports that the West Midlands, East Anglia, Yorkshire and Humberside and the North East have shown no change in logistics land values over the past year.
With prices rising, Wilson says: “The speculative focus is shifting towards less “well trodden” locations where land values are lower and occupier demand is emerging.”
Owen Holder of Knight Frank agrees: “To date south Yorkshire is experiencing a boom when it comes to large distribution warehouses driven mainly by the large amounts of available land, relaxed planning policies, good labour supplies and excellent road networks.
“A large percentage of these large scale distribution units are forward funded (as can be seen from the schedule) driven primarily by the yield compression on industrial property and the perceived returns by the investment markets.”
Mark Sillitoe of King Sturge has seen similar movements in Lancashire: “The region has been undergoing a revival with half a dozen new developments coming out of the ground in the last 18 months in Wigan alone, with more in the pipeline.
“This has been down to a number of reasons, the most obvious being land prices. For occupiers, the costs associated with traditional distribution hotspots have escalated to the point where they are starting to look further afield for better value for money. This has fuelled speculative development and whereas a prime North West location might cost in the region of £350,000 per acre, developers can pick up land for around £250,000 in places like Wigan.
“There is still a lot of developable land in Lancashire and the fact that the M6 corridor runs through the middle of it make it ideal for national and regional distribution centres.”
Julian Meredith, Chase Commercial which has been enjoying the fruits of speculative development, says: “The only downside is the increasing lack of available land on which speculative developments can be built – particularly as residential schemes seem to increasingly be the preferred choice for the redevelopment of brownfield sites. This is a typical trend spanning right across the country.”