Caution seems to be the watchword for developers and investors of speculative development alike, so what happens when one developer throws caution seemingly to the wind? Liza Helps reports.
Cautious, measured, focused, targeted, sophisticated, informed – words describing how speculative development of warehouse space is conducted at present in the UK by both developers and investors alike.
Yet from an occupier perspective the situation is woeful – putting it frankly there just isn’t enough speculative development to satisfy demand. If one were cynical one could almost believe that there was a conspiracy to keep supplies deliberately short to bolster both yields and indeed rent levels. And to a certain extent true – developers and investors of commercial property are not in it to be altruistic. Bottom line is they need to both make money and grow investment value; having too much stock available does not allow either of these aims to be met as evidenced in the last property cycle where vast amounts of warehouse properties were built and then stood empty for years at a time, rent levels stayed stagnant and capital values fell – indeed it is only recent years that these have recovered.
Chris North of JLL says: “I think there is an inherent caution within the UK institutional investment market to focus on core locations and to also prevent an over supply as seen in previous property cycle – that triggers strong and painful memories and is not easily forgotten especially when buildings stood about for up to seven years empty.”
Yet despite this there is a widely held belief that there will be an uptick in the amount of speculative development coming forward through 2018.
North says though: “We do not anticipate that it will be out of kilter with the overall supply and demand dynamic – investor caution has a brake on – so we do not foresee an oversupply in the short term.”
The reason for this is explained by Len Rosso of Colliers: “Occupational demand has been outstripping supply for over three years. While developers have responded to the supply shortage with an increasing number of speculative schemes, the response has so far been targeted and measured.
“The completion of speculative developments has made a difference to the overall availability rate, but it is still low. Spec development over 100,000 sq ft has been falling since 2016, with 4.3 million sq ft expected in 2018.
“Current UK existing availability over 100,000 sq ft stands at 29 million sq ft, including 5.5 million sq ft in Grade A space. This is an 3 per cent increase on the previous year due to delivery of new stock, however, the supply remains currently equates to 1.3 years’ supply based on annual average take-up.”
Vacancy rates are at their lowest, Gerald Eve’s Prime Logistics report noted: “The overall UK availability rate decreased in Q4 2017 to 6.3 per cent and remains far below the five year average of eight per cent.”
Tessa English of JLL says: “The average void period for a speculative warehouse building is seven months – quite a lot get let before PC.”
Rosso agrees: “Speculative warehouses do not hang around long in some areas two or three months supply will go very quickly and that will not change anytime soon.”
At LCP’s Prime Point scheme on the 185-acre Pensnett Estate near Dudley, Paula James of LCP notes: “As soon as the Prime Point development was announced, we were inundated with enquiries before any tools were in the ground. Now we are pleased to confirm all built units are fully occupied and all still to be completed are already under offer.
“This is a smaller scale of speculative development in the grand scheme of super sheds etc, however this venture has bolstered confidence for LCP to go to market with more development of this type in the future.”
The first phase of Prime Point provides 130,000 sq ft of space from 10,000 – 40,000 sq ft. The company is considering whether to speculatively develop out the second phase of the scheme, which had been earmarked for D&B up to 100,000 sq ft. Joint letting agents are Bulleys and Lambert Smith Hampton.
Andrew Jackson of Avison Young says: “There are a number of developers/funds announcing speculative development – when the market is in the state it is at the moment with a healthy demand and supply balance, they will take the risk of speculative development because the majority of businesses prefer to take an existing building rather than bespoke mostly due to timing and an element of certainty.”
At present David Binks of Cushman & Wakefield says: “At the end of 2017 there was 7.5 million sq ft of speculative development completed in 53 units of which 44 were below 200,000 sq ft.
“When we look at buildings under construction across the country there is another 40 totalling 5.6 million sq ft above 50,000 sq ft. Despite these numbers though, there is definitely a shortage of space in most locations.”
Luke Tillison of Kirkby Diamond says: “There is not enough. Speculative development is needed and required but developers are twitchy and the hard reality is that Brexit is around the corner and there are too many uncertainties making funding just that little bit tighter.”
Toby Green of Savills notes: “Developers, such as Prologis, are taking a much more calculated and informed approach when they speculatively develop.”
Indeed Prologis’ Paul Weston says: “We did take a bit of a pause but speculative development has continued to roll out the difference is that this time back in 2007/8 we had about four million sq ft vacant space and nationwide there was probably 25 million sq ft Grade A of empty buildings; it is a completely different picture this time around. We are very focused on core market – East and West Midlands, Southern M1, London and the south east and we have only one million sq ft of speculative development at any one time available or under construction.”
Prologis is speculatively developing four buildings totalling 310,000 sq ft at Hemel Hempstead, which are expected to complete in autumn 2018. The units are the first to be constructed on the park, a 35-acre site that Prologis acquired in March 2017. The speculative scheme can meet a range of occupier requirements, from 11,000-169,000 square feet, as two of the new buildings have been designed to be subdivided. Each facility will be built to achieve a minimum BREEAM ‘Very Good’ accreditation, the best possible EPC rating for its size and each will include a rooftop solar installation. Joint letting agents are Lambert Smith Hampton, CBRE and Brasier Freeth.
Other schemes coming forward speculatively include a 152,365 sq ft unit at Prologis Park West London which is scheduled for completion for late autumn 2018.
The majority of developers and funds are of the same persuasion, Andrew Dickman of dbSymmetry says: “In our business model we look at how strong or weak the occupier market is [in each location]we carry out comparison analysis, demand analysis and we may choose to consider speculative development after a long hard look responding to the market dynamic. We take an intelligent and informed view of what the risk element is – acknowledging that there is a reward balance, a first mover advantage. However spending millions without an occupier could be considered rash…”
The company has around 1 million sq ft of speculative space built or under construction across a variety of locations from Swindon, Bicester, Banbury and Doncaster and is considering another wave totalling 400 – 600,000 sq ft in 2018.
The 217,323 sq ft speculative development at Symmetry Park Swindon is due to complete in the first quarter of 2018. Letting agents are Savills, Colliers and Whitmarsh Lockhart.
Stoford is another developer with a number of schemes coming forward. Tony Nash of Stoford says: “We have managed to start on site with probably another four or five projects, which had been put on hold due to Brexit.”
The developer has teamed up to form a number of joint ventures with funds including Blackrock, Liberty Property and TPG Real Estate.
It has just started construction of a 103,300 sq ft warehouse/distribution unit at Siskin Parkway West, Middlemarch Business Park, Coventry, known as Carbon 103 funded by Blackrock.
Carbon103 lies in close proximity to Carbon 207, a 207,340 sq ft warehouse/distribution speculatively developed by the two companies which recently reached practical completion.
Matt Wheeldon, director of BlackRock, said: “The speculative development of good quality logistics space in prime, supply-constrained locations is one of BlackRock UK Property Fund’s key strategies.”
Joint letting agents are CBRE and Moriarty & Co.
Not every developer is considered and cautious though and into this mix comes First Panattoni – its caused quite a stir.
The company has announced that it will develop 3 million sq ft of space in the UK speculatively with those in the know saying its decision to build 300,000 sq ft plus properties ‘goes against the risk profile of most institutional investors’; others says it going to be a ‘change the [speculative development]landscape’.
With raised eyebrows property pundits all agree its an ambitious target and wonder where all the land is going to come from to facilitate the development of all the speculative space.
Matthew Byrom, managing director of First Panattoni is unconcerned: “The UK is a hugely untapped market and given the buoyancy of the occupational market there is an unexplainable lack of speculative space in the UK market.”
The company which has secured £300 million to progress the first wave of speculative development is launching a number of sites in March including a 450,000 sq ft cross dock facility at Four Ashes in Wolverhampton as well as a 550,000 sq ft unit at Nottingham 26 just of Junction 26 of the M1 motorway.
It has also reportedly secured a former Sainsbury’s warehouse at Borehamwood for a record £3 million per acre.
Byrom says: “We would have liked to have extended our goal to hit 5 million sq ft but we cannot acquire sites quick enough for that. We want to secures good locations and penetrate all the sub regional markets as well. Certain locations are under priced at the moment and perhaps with some of our recent bidding that is being recalibrated quite quickly…”
The company has ambitions to be the pre-eminent strategic speculative provider of warehousing in the UK as it is in mainland Europe. “We will continue aggressively through 2018 and 2019 and would like to be building around 3 million sq ft of speculative build a year. Our focus is in the 300 – 750,000 sq ft range in core locations where we see demand strongest and supply most limited.”
Byrom continues: “The landscape is very different from the last cycle, the bigger players in the market are more focussed on Build to Suit and there is no large scale strategic speculative player in the UK at the moment.
“The UK has an interesting dynamic, such a strong occupational story and clearly where we are in the property cycle there just seems to be such an opportunity to speculatively build that we have not seen in this cycle and indeed maybe not before.
“In the next two years we don’t see any strategic scale speculative developer piling in the to UK market. The historical low yields that at the end of the day drives the whole speculative build market looks set to continue with the re-pricing of a whole sector and the expectation of further rental growth and we have the weight of money to progress.”
Perhaps there is good news on the horizon for occupiers….
£100m Manchester development
Icon Industrial has launched its £100 million logistics development at Manchester Airport. The development has outline planning for one million sq ft and is capable of delivering units from 100,000 sq ft to 700,000 sq ft. Icon Industrial is a joint venture formed by Stoford Developments and TPG Real Estate. Dan Gallagher, joint managing director of Stoford Developments, said: “This project marks the exciting first development for the joint venture and presents potential occupiers with an excellent opportunity to have a unit built to their specific requirements in a key strategic location at the very heart of the Northern Powerhouse.”
Developer Barberry is to start a 65,000 sq ft speculative development in Birmingham
The facility is on a 2.9-acre plot at the Advanced Manufacturing Hub in Aston. Barberry 65 is located immediately adjacent to Junction 6 of the M6 motorway and is due to be completed by the end of Q3 2018. The company is also currently nearing completion of a 46,000 sq ft industrial unit – known as Barberry46 – at a site on the A34, between Birmingham city centre and Junction 7 of the M6 motorway. Savills and JLL are the retained property consultants for Barberry.
Aviva Investors is to speculatively develop a 170,000 sq ft industrial scheme on the Uxbridge Industrial Estate in West London. The company will develop three industrial and distribution warehouse units at the site. The warehouses will be collectively known as Uxbridge Industrial Park and will be highly specified, comprising three separate units of 119,653 sq ft, 36,017 sq ft and 11,505 sq ft in size.
Development work has started on a 111,287 sq ft speculative distribution warehouse at Weston Road, Crewe. The six-acre site forms part of a larger 12-acre site which was acquired by US based Cabot Properties with Quorum Estates in 2017. Rob Taylor, partner and head of North West logistics & industrial at letting agents Knight Frank said: “Q110 will deliver a great quality building in a prime location which will serve latent demand along the M6 corridor. Legat Owen are joint agents.
This article first appeared in Logistics Manager, March 2018