What opportunities are there for occupiers in a market where demand is soaring but availability is in short supply? Liza Helps reports.
Competition for the right space in the right location is now intense in the West Midlands and, says Simon Norton of Colliers International, “speculative developments such as those built by IM Properties at The Hub in Birmingham and Birch Coppice Tamworth, have found themselves negotiating with occupiers long before completion”.
This is exactly the situation at Canmoor and Savills Investment Management’s 170,000 sq ft Black Velvet scheme in Hams Hall. The warehouse has gone under offer to The Works prior to completion on a 10-year lease a rent rumoured to be around £6.35 per sq ft.
Over in Tamworth, St Modwen is thought to have leased CP52, its 52,000 sq ft speculative warehouse at Centurion Park, on 10-year lease with no breaks. The unit is still under construction. In addition, IM Properties looks like it has leased a 47,000 sq ft warehouse on the latest phase of speculative development at Birch Coppice, as well as securing a tenant for one of the two 50,000 sq ft plus warehouses it is building speculatively at The Hub in Birmingham.
Stuart Mair of CBRE says: “Somewhere in the region of 95 per cent of all speculative development in the West Midlands is let prior to or just after completion.”
Alan Sarjant of Prologis notes: “Demand levels are robust and product coming out of the ground has a strong level of interest – usually more than one occupier for each unit.”
According to Knight Frank’s latest LOGIC report pre-let/pre-sale transactions accounted for the majority of demand in the last half of 2015 with 68 per cent of total take-up falling in this category and a further 11 per cent of take-up accounted for by new spec built space and coming into 2016 the trend does not seem to be slowing down.
Jon Ryan-Gill of Knight Frank says: “This highlights the lack of supply and growing confidence in the market.”
Key pre-let/presales deals include DHL at Rugby Gateway (237,258 sq ft) and Birmingham Wholesale Markets at The Hub, Birmingham (241,885 sq ft).
Total take-up of units over 50,000 sq ft across the Midlands region as a whole reached 7.5 million sq ft in the second half of 2015. This is 44 per cent ahead of the five-year half-yearly average. The retail sector remained the key driver of demand, accounting for 29 per cent of total take-up, while take-up from the manufacturing sector increased to 22 per cent of the total in the second half of 2015.
With such a strong market it is no wonder that the majority of the UK’s speculative development at present can be found in the region. Knight Frank says there is some 3.8 million sq ft under construction across 24 buildings with more set to follow.
Bruce Topley of IDI Gazeley says: “In the Midlands we have about 6.5 million sq ft of supply but that is reducing rapidly with speculative builds being taken-up almost before completion. That being said, there is roughly a year’s supply in stock available.”
Nick Waddington of MWRE says: “The demand/supply equation is slightly in favour of landlords.”
He adds that with the increase in speculative development there are ‘a few doom and gloom merchants saying there is too much speculative development and not really the demand for it but the speculative development programme has not got out of hand, it is very rationally considered.”
Ranjit Gill of Savills agrees: “We are not seeing funds and developers pile into speculative development [as seen in 2007]. It is still being done but on a select basis and only in prime locations.”
According to Waddington: “There is in fact still scope in certain locations for more speculative development to come along especially in the mid-box range.”
Andrew Cosnett of BNP Paribas Real Estate agrees: “Speculative development is taking place but there is not quite enough. Demand for units between 50 – 60,000 sq ft seems to be a sweet spot as there are only so many of those coming out the ground and arguably not enough for the market at the moment.”
String demand and lack of supply is inevitably having an effect on rent levels. Waddington notes: “Rent levels have really started to push on with DHL taking Bericote and Rockspring’s 102,750 sq ft speculative warehouse Chrome 102 at Minworth at a rent of £6.35 per sq ft.”
The property has 99,000 sq ft of warehouse space, 12m eaves height as well as 8 dock and two level access doors. It has 3,750 sq ft of offices 17 HGV and 107 car parking spaces. Letting agents are JLL and Lambert Smith Hampton.
“Over the last 12 months the continued lack of grade A stock in the West Midlands, particularly in the Golden Triangle has forced industrial and warehouse rents up significantly to reach quoting levels in the region of £6.50 per sq ft; along with a continued reduction of incentive packages offered to occupiers.”
Gill believes that rents for smaller units in prime locations will top even £6.50 per sq ft.
It’s not just in new builds and speculative development attracting higher rents, according to Robert Rae of Avison Young: “Even in second hand units market rents have established themselves at £6 per sq ft for 10 to 15 year old stock in prime locations.”
Savills and Cushman & Wakefield are marketing the 165,000 sq ft ex-Wincanton shed at Middlemarch at £5.95 per sq ft while a 50,000 sq ft second hand warehouse in Aston went to best bids.
Rae continues: “At rent review rental increases are now common.”
He says that occupiers are now resigned to increases in rent levels. But it is not just rent levels, lease terms are also taking a hit with landlords and developers reluctant to give 5 years breaks, with a straight 10-year lease more common. Incentives are also harder to come by.
However, Mair says: “With the amount of product coming onto the market – while headline rents will not move – developers may be put in a position whereby they could vie for occupiers with capital fit out inducements.”
He continues saying that in general, lease terms are still heavily affected by an occupier’s covenant strength.
“It also depends on who is developing; developer investors such as Prologis, Brookfield and Goodman can take a different view on inducements and lease terms while other developers who have backing from funds and have development management contracts will have to fulfil on funding agreements.”
Land price has a direct affect on this, with higher land prices meaning that funding criteria becomes tighter.
Two of the big challenges facing the sheds market in the West Midlands and indeed the UK as a whole, at the moment relate to land.
The first is the issue of finding available chunks of land suitable for new development, and the other is the rapidly rising cost of this land.
This is outlined in new data supplied by Bilfinger GVA. According to the company’s research, the average price of an acre of land has risen from £528,846 in Q1 2014 to £751,923 in Q1 2016 – a 42.2 per cent increase.
“The increase in land values has been fuelled by the lack of standing grade-A stock available to both occupiers and investors, particularly in locations where prime development sites are in short supply,” says Dan Francis, director and head of research at Bilfinger GVA.
Francis says that land values across the South East saw the most significant uplift over the past two years, followed by the Midlands.
Unsurprisingly, land values in the golden triangle have also jumped significantly in the last two years. “In the three locations monitored in the Midlands – Birmingham, Coventry and Northampton – values currently stand at £600,000 an acre, an increase of 30 per cent,” says Francis.
The average price of an acre of land in Coventry leapt from £450,000 in Q1 2014 to £600,000 in Q1 2016. Over the same period rents have risen from £5.75 per sq ft to £6.25 per sq ft and rent-free periods – on a 10-year term – have dropped from 12 months to six months.
The availability of land for new developments is a bone of contention as sites are rapidly being snapped up. SEGRO and Roxhill’s Rugby Gateway is all but full with just two speculative units remaining following lettings to Hermes and DHL.
The two units are RG2 totalling 290,000 sq ft and RG3 totalling 180,000 sq ft. Both are due for practical completion in August. Joint letting agents are CBRE Cushman & Wakefield and Gerald Eve.
Gareth Osborn of SEGRO says: “The scheme has been very successful and we already have interest in both buildings.”
The 125-acre scheme secured its first letting in May 2014, infrastructure works started only a few months prior to that which means from infrastructure commencing in Autumn 2013 to completion of all the buildings taking a mere three years.
Gill says: “A continuing development pipeline all depends on getting the right quality of land in the right location to build on and right now there is limited availability of land.”
Simon Lloyd of Cushman & Wakefield says: “It is no surprise to see that councils are looking to allocate more green belt land for development.”
He cites Birmingham Council proposals for land at Peddimore to be reallocated for employment. The site totals 80 acres. And while it has identified other sites for logistics much of it is in small chunks of one to three acres and thus not suitable for big shed development.
All this is not helped by the fact that many sites that could provide large shed development have been blighted by the Government’s HS2 rail scheme such as at Washwood Heath.
In Birmingham, Sarjant notes: “This has left the market in a situation where if you wanted to develop a 100,000 sq ft warehouse you would not be able to find a suitable site.”
Prologis is working through a 40-acre site in Hams Hall, which formerly accommodated the cooling towers of the power station. Such a site should be brownfield but a quirk has meant that it is allocated greenbelt. Getting it reallocated, says Sarjant, is proving challenging.
“We will make a planning application on that site in April,” he says. The site, to be known as Prologis Hams Hall, could accommodate up to 800,000 sq ft of space. The developer expects to make a £70 million investment to develop it. It will be rail connected.
“Planning hurdles are immense and in the case of sites such as this the government could waive greenbelt restrictions in special circumstances where there is a demonstrable need to support economic growth.”
Last year Roxhill’s plans for its 4.5 million sq ft Coventry Gateway scheme were frustrated by Eric Pickles, the communities and local government secretary, who turned it down, citing greenbelt issues despite the scheme having been approved by Warwickshire Council and Coventry Council. It was supported by Coventry and Warwickshire local enterprise partnership.
The scheme was made up of two separate plots. The southern 200 acres capable of providing 3.6 million sq ft of large B2/B8 warehousing, while the northern 60 acre plot fronting the A45 had the potential for a variety of B1(a) (b) and (c) uses together with a hotel and other ancillary retail uses, totalling 900,000 sq ft.
However, it is thought that the scheme will be put forward again this year having, it is rumoured, garnered the not inconsiderable support of Jaguar Land Rover. It will be promoted by both Roxhill and new fund partner SEGRO.
While this is considered one of the larger sites to be pushed forward, other developers are not standing idle on the big shed front. Dan Gallagher of Stoford, which has entered into a £100 million development partnership with Liberty Property Trust, says: “We are actively targeting sites where the planning system is falling down and there is a shortage of development land. We are looking at natural extensions to existing sites.”
The formula is paying off. The company recently submitted detailed plans to speculatively develop three warehouses at their £38 million 30-acre Liberty Park scheme in Lichfield, West Midlands.
The warehouses will measure 102,000 sq ft, 31,500 sq ft and 27,000 sq ft respectively and, subject to planning approval; work could begin on site this summer. Letting agents are CBRE and Avison Young.
Stoford is also progressing with a number of other sites in the West Midlands including a 1.1 million sq ft scheme in Redditch, which it is taking through the Local Development Plan as well as moving forward with the 25-acre second phase of Stonebridge Cross in Droitwich, Worcestershire that could deliver 500,000 sq ft.
Letting agents are Savills and BNP Paribas Real Estate. There is also the 19-acre Pantheon Park in Wolverhampton that could accommodate a single unit of 400,000 sq ft on a Build-to-suit basis.
Prologis is also actively bringing forward schemes and units. It is speculatively developing two units of 141,500 sq ft and 328,000 sq ft at its flagship Prologis Park Ryton in Coventry. Both buildings will complete in the spring of 2016. Letting agents at Prologis Ryton are North Rae Sanders, JLL and Gerald Eve.
In addition the developer is progressing forward with its 65-acre Fradley Park scheme. It has started infrastructure works worth £4.75 million to open up the site which could accommodate up to 1 million sq ft. The largest single unit could be up to 700,000 sq ft. Letting agents Savills, JLL and Harris Lamb are quoting rents in the region of £5.50 per sq ft.
In Coventry a 650,000 sq ft three unit speculative scheme is being brought forward at the airport by Ostrava Properties, the property investment division of the Rigby Group
The new facilities on a 30-acre plot, which has lain unused since 2009, will comprise of three units – a 75,000 sq ft building, another extending to 175,000 sq ft and a third providing 350,000 sq ft of space.
Letting agents on the scheme are Colliers International, Cushman & Wakefield and DP Holt.