Although figures for the last quarter of 2009 revealed pockets of strong activity, there’s no denying that the last 12 months have been tough. Overall, the figures show that the industrial market has done reasonably well. We hope that the next year brings further improvement. Strong growth shown by recycling companies may provide a source of that growth and therefore this report focuses on
the green sector.
Some recovery, but development will have to wait…
The UK pulled out of technical recession in the last quarter 2009 but the market still feels fragile. Landlords have been holding on to tenants at any cost, renewing leases and giving generous concessions. We’re all by now familiar with the US term, to ‘extend and blend’. Occupiers have seized the opportunity to reduce costs while avoiding Capex associated with relocation. Some industrial occupiers, however, have started to move again with caution.
The industrial market is expected to recover slowly this year with, I suspect, peaks and troughs of demand but, overall, an improvement in take-up. Supply is likely to remain varied and constrained, with developers fearful of any speculative development. This will ultimately put pressure again on land, particularly in Greater London and the South East. A slow recovery in the real economy plus a May election will make take-up hesitant until after the election while companies work out what the real impacts will be.
Rents still subdued
On the whole, rents are likely to remain subdued or they will continue to fall slowly (say 5-8%), but incentives will most likely start to harden. The investor market has become over-confident again and some landlords may be tempted to push too hard on terms, especially where the occupier and tenant market remains fragile. The fundamentals must make sense and landlords should continue to offer flexible deals, at least until the end of this year and not get carried away by hype and rush of cash again.
Occupiers – make the most of it
Occupiers should take the opportunity to buy well priced freeholds and land, which may be worth banking in the short to medium term. Land disposals will be dominated by retailers on pre-lets looking to reconfigure and increase their footprints. Amazon, which is looking at 1,000,000 sq ft in Scotland, is a notable example. The recent acquisition of Somerfield by the Co-op is also bringing new space
requirements to the market, particularly in Bristol. Note their recent acquisition in Andover which beat off Tesco.
The over-supply of small shed schemes of sub 5,000 sq ft freeholds built speculatively in the last four years is now being taken up, albeit at reduced prices. Deals involving short-term leases with options to buy are proving very popular with occupiers and work well for landlords too. Prices for this type of product are likely to remain stable.
The average size of 5,000-20,000 sq ft is where the bulk of the market lies and landlords would be wise to consider all covenants including SMEs, which is where the main demand lies. The big shed market, particularly in areas such as London, has seen good take-up by a number of manufacturing and green related industries in the last 12 months which is encouraging, as well as some 3PL’s. It
is clear there is going to be a lack of big sheds within the M25 by the end of the year unless second hand old stock becomes available.
Be ready for the receivers...
The big opportunity is going to be in receivership property this year for prop co’s and occupiers. There has already been a spate of banks calling these in, now that their balance sheets are stronger. These are likely to dampen values for secondary stock and some significant deals may come to market.
Green isues
Economic woes have distracted attention from the green agenda again, but sustainability is not going away. Environmental organisations have lost their confidence to really push this into the main frame but general awareness is improving, none the less, and this is translating into some fantastic technology and emerging requirements right across the country. Local authorities need to deal with their waste and lack of landfill opportunities. Companies such as Solena, which recently announced their agreement with BA to build the first European jet bio-fuel plant in the UK, represent a significant opportunity for land owners. EPC’s still need to be sold better to both occupiers and landlords who need to appreciate the potential value that greener buildings bring to their businesses.
All in all, this is not going to be an easy year but at least there is a good pulse present in the market and expectations are well balanced on both sides; there is an opportunity to trade and for businesses to do well in the industrial market.
Overleaf is an updated region by region indication of property values, land capital and rentals, as well as an overview of the economic variations, GVA per head and labour rates, and a summary of recent news items.