In a market where there is a huge volume of cash chasing limited product, it would be easy to assume that investors who secure that elusive shed deal are in a win-win situation. But Yorkshire agents are warning that, even though there is the potential for some cracking deals, some investors could get into trouble unless they are cautious.
The pressure to secure good returns is high, and sometimes a building let to a good covenant on a long lease, but bought at an already low yield, offers little room for further yield movement.
In order to achieve good returns, investors have been looking at secondary stock, off-pitch locations, speculative forward funding and buying stock under construction.
Secondary values are closing in on prime – something that Knight Frank warned about in its annual Leeds report at the beginning of the year – which could indicate that secondary stock is overvalued.
As a result, many are looking at speculative funding. Rupert Visick of Gent Visick explains that “it offers the opportunity to buy property at a discount that reflects its vacant state,” he says. “If you can then let it to good covenant, the investment will benefit from an instant yield shift”.
Inevitable risk
With the cost of lorry movements crucial to the distribution industry, investment in an off-pitch location is inevitably riskier. “From a developer’s point of view, it’s where can I buy land and ‘where can I buy it cheap’,” says Visick. “People are looking at more off-pitch locations.”
As a result, warns Miles Youdon, investment partner at Donaldsons: “A lot of institutions are casting the net wider and looking at secondary locations. Any investor looking at the industrial market should look very carefully at the competing schemes and weigh up the potential of securing a tenant.”
He cites Wakefield Europort at junction 31 of the M62 and Sherburne in Elmet east of Leeds off the A1M. “Geographically, they aren’t that far apart, but Wakefield has much better access and is much more popular.”
Jonathan Peasegood, head of investment at GVA Grimley, also believes that speculative funding – which has been particularly prominent in South Yorkshire, where there is more land with consent available compared with West Yorkshire – is getting risky. Institutional investors such as Standard Life, AXA, PRUPIM and RREEF are all funding schemes speculatively in the area.
But South Yorkshire is a relatively young market, having come to fruition as a distribution location only in the past two or three years. The arrival of some big occupiers, such as ASDA and Next, which between them have taken more than 1.7m sq ft of space, has reinforced the market. There are now other big name requirements circling, such as Tesco, which is looking for 700,000 sq ft, and Marks & Spencer, which requires 300,000-500,000 sq ft.
This is good news for investors that are funding or have bought speculative developments. Mark Hopkins of Rupert Visick adds: “If half the requirements that are out there land in the next three months, people won’t be too worried.”
Investor interest in the area will be further fuelled by a report by Lambert Smith Hampton that predicts continued annual rental growth – albeit modest – for Yorkshire’s industrial market of 2.9% this year, 3% in 2008 and 2.8% in 2009.
Peasegood adds: “Rents are still at decent discount to other distribution locations in the East Midlands and North West, so occupiers can still see they are getting value for money. Therefore, there are still prospects for rental growth.”
And there are locations that still offer good investment opportunities. David Watson, head of investment at Lambert Smith Hampton, cites Normanton at junction 31 of the M62 as an example, bolstered by its close proximity to the A1M. Likewise, Doncaster is a proven location that could offer further opportunities.
“There are still good things out there that you can buy,” he says. “We are still seeing steamy yields, and I’m sure there are idiots out there that would buy but I wouldn’t advise taking on a 4-4.5% yield unless there is a really good angle to the investment.”
Market at a glance
Further rate rises could affect yields
Caution creeping in
Rental growth predicted
Yields will remain static or soften by end of year
Good locations still a winner
The Bank of England’s interest rate rose this month and, with further rises forecast, some agents are issuing notes of caution.
David Watson, head of investment at Lambert Smith Hampton, says: “What people forget is that, yes, interest rates have gone up, but there is still a weight of money in the market which is keeping yields low. However, if interest rates break through 6% by the end of the year, the rises will have a larger effect on yields.”
He predicts softening yields by the end of the year and a reduction in capital values.
“A lot of the property companies have taken note of the fact that it is a sellers’ market, and those that have got out are now sitting back and watching what happens,” says Watson.
