Hot tubs aren’t time machines, but can hot tub suppliers predict the future of the industrial market? It’s a question few ask, but talk to Derek Heathwood, Hansteen’s head of UK asset management, and you might kick yourself for not asking.
Back in 2016, a company now called London Spas Manufacturing took 10,400 sq ft in Eaglescliffe, near Middlesbrough, to run its business, importing hot tubs from China and selling them in the UK. Demand grew and suddenly importing from China made little sense.
“They realised they couldn’t react quickly to their customers and it was relatively expensive, so they ended up taking a lot more space from us and started to manufacture the goods themselves,” Heathwood says.
Between the switch from importing to manufacturing and an expansion to 35,000 sq ft in Hartlepool, London Spas Manufacturing reflects an underlying trend in the UK market.
Industrial take-up last year totalled 24m sq ft – 35% less than the record-breaking 37m sq ft achieved in 2016, according to Savills. This was expected. Following up a year that included a 2.2m sq ft pre-let from Amazon was always going to be difficult, especially because of how rare deals of that size are and how much of an affect they singlehandedly make when they do happen.
But while e-commerce take-up plummeted 68.6% from 9.6m sq ft to 3m sq ft – its share of total take-up shrinking from 26% to 12% – the manufacturing and automotive sectors held up in what could be a transformative trend for the sector (see graph).
In the months after the EU referendum, there were renewed worries about UK manufacturing finding itself tumbling off a cliff. IHS Markit’s Composite Output Purchasing Managers Index, which measures manufacturing output and services business activity, fell to an 87-month low of 47.7 in July 2016 as the UK economy contracted at the sharpest pace since 2009. Manufacturing fell to a 41-month low. The “one ray of light”, Chris Williamson, chief economist at Markit, wrote at the time, was that exports would be cheaper with a devalued pound.
The car industry was particularly pessimistic, with the Society of Motor Manufacturers and Traders warning that Brexit would overwhelm an industry dependent on back and forth trade with the Continent – for parts and sales. New tariffs, they argue, could add at least £2.7bn to imports and £1.8bn to exports every year.
But take-up in 2017 tells a different story. Manufacturing accounted for 20% of all new leases, up from 17% despite a dip in total take-up – the fifth consecutive year its share has grown. Automotive take-up jumped from 6% in 2016 to 11% and was one of the few sectors to increase its activity last year, taking 2.7m sq ft – up from 2.2m sq ft in 2016.
David Binks, head of Cushman & Wakefield’s logistics and industrial team, says this does not surprise him: “The manufacturers we have done work for have had genuine new expansion because of new contracts they’ve won with their customers.”
For example, Magna International, which supplies parts to companies including Jaguar Land Rover, announced an £80m, 225,000 sq ft aluminium castings facility in Telford in August.
A few months later, aerospace company Meggitt unveiled plans for a £130m, 440,000 sq ft site in Coventry.
These are signs that these sectors are not just active but expanding. The latest Markit PMI UK report confirms this: manufacturing might have dipped slightly at the end of the year, but November’s 58.2 was a 51-month high and the final quarter average was the best since Q2 2014.
Tessa English, associate director of UK research at JLL, says: “Globally, most countries are forecast to see good levels of GDP growth over the next few years, and this is increasing consumption, which is boosting the manufacturing market.”
What about the referendum?
But Brexit has yet to happen. Can the industry count on continued growth when there is uncertainty about what lies ahead, or what new tariffs could be introduced?
For Sally Duggleby, head of industrial and logistics occupier services at Savills, and former head of real estate at Amazon UK, that question explains the relative inactivity in some parts of the market last year.
“There’s nothing worse than uncertainty and right now there’s a lot of that,” she says. “I know what I would be doing: I would be playing a strategy game at this stage, trying to make sure that I’ve secured some options for the most likely outcomes.”
But the opposite strategy is driving some occupiers. Binks says: “Manufacturers work on very short windows to make these decisions, so they tend to say ‘Let’s deal with it now, and then see what happens in two to three years’ time.’ Some of this activity could be people moving ahead of Brexit so they’re avoiding any of those enhanced costs.”
That kind of mentality could explain why car manufacturers like Jaguar Land Rover, which is seeing particular growth in North America and China as the pound devalues, are still looking to expand in the UK.
Others, Binks adds, are looking at Brexit and thinking that they would be in a better position making things in the UK for a domestic market, avoiding the problem of tariffs all together.
This is where Hansteen and London Spas Manufacturing come in. Ian Watson, co-chief executive of Hansteen, says: “If goods coming into a country are more expensive, it might just encourage more people to start up small businesses and manufacture for our own domestic purposes.”
That could continue to bolster manufacturing take-up in years to come, but in Watson’s market – multi-let urban logistics – there has always been a place for manufacturers: “Even in the dog days when people said ‘There are no manufacturers in Britain left’ we always said ‘Well, there are, because we’ve got plenty of them’ – little businesses working away, some very high tech, some very low tech. But they’re still making things all the time.”
Has e-commerce demand peaked?
Watson is quick to explain that in Hansteen’s market 2017 was a strong year, including in e-commerce. The suggestion is that the total e-commerce figures were skewed because of major big box deals in 2016, while smaller occupiers are just as active as they were 18 months ago.
“E-commerce has not plateaued in any way, shape or form. Overall, 2017 was a better year for us in terms of occupancy than 2016. About a third of our new tenants were e-commerce, either selling on their own websites or another platform,” Watson says.
Even if e-commerce occupiers lack the Amazon-style mega-deals and are more dominant in urban logistics, there is still room for expansion.
Like the hot tub suppliers, online – and high street – retailers need to invest in more industrial space to speed up supply chains and speed up their access to customers.
English says: “[E-commerce] demand hasn’t peaked. Part of that is because even some of the biggest occupiers in the e-fulfilment market still get press saying they’re not making their deliveries on time.
“You offer next day delivery and not all those deliveries get made the next day. Will the customer shop with you again?”
On top of this, fashion retailers also have to process a huge number of returned items. Nigel Harris, senior asset manager at John Lewis, told audiences at the EG Industrial and Logistics Summit last November that 10m items were returned in 2016. Those returns pass through as many as seven hands before they are put back into stock.
Dedicated returns facilities, English says, offer a “massive opportunity” to improve efficiencies: “Retailers need to know where their stock is, particularly at times of the year when you have sales on. If you have sold something at full price and it’s coming back to you and it’s now on sale, you want to sell that as quickly as possible because you’re running on tight margins.”
The supply needed to accommodate that is not a major concern for English, with vacancy rates marginally up from 5% to 6% in 2017 and supply up 21%, but occupiers might have to make compromises to secure space.
Unemployment is at an all-time low and European workers, whose future is uncertain, make up 13% of all process, plant and machine operatives in the UK, according to the ONS. Both retail and manufacturing occupiers might have to compromise on location to get the right skills, particularly in the aviation and automotive industries that are more reliant on highly skilled workers and high-tech, bespoke industrial space.
For Watson, changes and new challenges – whether for e-retailers or hot tub manufacturers – are a natural part of a market that is always evolving. Demand among all these sectors will continue. “We can’t buck the economy,” Watson says. “But whatever condition we’re operating in, those small sheds are very resilient.
“For 30 years we have found that’s the case. We’re much more resilient than people think.”
Investment
Regardless of shifts within the industrial sector, investors show no signs of stopping. According to Savills, the UK warehouse market hit £7.7bn in 2017 – up from £6.1bn in 2016 – accounting for 14% of all investment deals.
Yields continue to fall (see chart), and even small rent movements of 50p per sq ft make a significant difference to investors who buy hundreds of thousands of sq ft of space.
Will this trend continue? Jonathan Compton, head of logistics strategy at CBRE, is sceptical. “Yield compression is at such a level that we find it difficult to see it getting stronger. That’s not to say it won’t remain a very popular asset class because what’s driving demand is tangible rental growth coming through, rather than yield compression.
“The feeling is yields will level off in 2018.”
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