The UK is experiencing a boom in the construction of huge warehouses to support consumer habits and the move to online shopping. According to research by Knight Frank, nearly 37m sq ft of warehouse space is earmarked for construction in 2021, while investment in UK warehouses totalled £6bn in the first half of the year. Overseas investors account for more than half of the total.
Every month seems to bring headlines of more businesses signing up to deals to take super-sized “sheds”, including online retailers, supermarkets, data centres and food and drink operators. The attractions are not difficult to see: businesses are able to benefit from spacious, well-connected, modern, environmentally friendly, low-energy-consumption premises in order to improve their supply and distribution functions. Employee wellbeing is boosted by all the latest interior design trends, such as living walls, and there are often charging points for electric cars. It gives local authorities the chance to regenerate old industrial areas or to bring jobs to support housing and the creation of places. It enables the UK to compete on a global scale by boasting a motivated and efficient workforce and an efficient distribution network.
For developers, funders and investors, then, what are the key legal points to consider when weighing up whether to construct or invest in warehousing? The nature and location of sites suitable for warehousing development can make the project tricky, and there is a lot to consider. Most developments are undertaken by seasoned developers in the sector with good reason.
Buying land and potential restrictions
The first challenge is to secure a parcel of land suitable for development that has appropriate road access and availability of utilities. Competition for land can be intense and prices can be high, which will impact returns. Some sellers may insist on sharing in the profits of any development by imposing clawback or overage payment obligations. Some may ask for the project to be undertaken as a joint venture, so they retain some influence in it. Imposing restrictive covenants on the use of the land can also impact long-term plans and restrict changes of use.
Environmental considerations
Some sites suitable for warehousing may be located on former industrial land or land which may be contaminated. This liability should not be underestimated, and clean-up costs can be significant.
Flooding, drainage and waste management are all potential Achilles heels, so understanding the nature of the site and its shortfalls is vital. Intrusive site surveys and specialist environmental input will be essential, as well as ongoing management plans.
Access and services
Proximity and access to key roads, rail and other transport links and to utilities is essential. You also need to consider whether new road networks will need to be laid, and therefore seeking agreement from the highways team at the local authority must be factored in.
Remember that access across private roads can be problematic, as if they are owned by a third party then it is possible that any existing access rights are limited to the original use of the land and not to a warehouse the size of a football pitch with all of the resulting increase in traffic and use.
Utility connections need to be verified and suitable supply agreements entered into with the providers. It is important to ensure that the capacity of the services will be suitable for the potential range of occupiers. Imagine installing electricity with a certain capacity only to find out that occupiers need considerably more. Also consider who will maintain the access roads in the future. Will they be adopted by the highways authority or retained as a private road network and maintained by you or a new management company?
Planning regime
There is no doubt that the planning application process sits alongside the land acquisition step in terms of importance. Often the purchase of the site will be conditional on a suitable planning consent being granted. A developer will want absolute discretion in deciding whether or not a consent is acceptable. A seller may want its costs to be paid if a developer decides not to proceed and some form of non-refundable payment, given that it will have kept its land off the market for potentially more than 12 months.
Local authorities may be keen to see development in the particular location, but proposed developments close to residential areas can lead to locals having their say, and there are numerous examples of challenges from residents about height, density and noise concerns.
Specification
Occupiers have high standards, and the specification will need to meet demands on height, size of yards and number of loading doors. Most occupiers will want to sign an agreement which stipulates the specification of the warehouse to be handed over. Large global brands will have standard requirements that they will not divert from. It is important to ensure that you can comply with these requirements, otherwise the occupier may be able to pull out of the deal.
It is common for certain businesses to work with specific developers as they get to know one another and their requirements and end product. Building relationships can, therefore, be fruitful and can bring long-term development activity for both parties.
Maintenance
Having built the warehouse, the ongoing maintenance of the building and surrounding estate is important. In the event of a sale, the owner will take on liability for the building and perhaps contribute towards the cost of maintaining the common roads and landscaped areas. If you decide to let the warehouse to a tenant then the relationship is closer. There may be shared liability for repairs under a lease, and even the developer may be liable for repairs for a certain period after completion.
Having a proper maintenance regime and ensuring that you obtain warranties and guarantees from the professional team responsible for the design and construction of the warehouse is critical if you want to avoid having to pay for potentially expensive repairs later down the line. It may also be necessary to set up a management company to take over the common parts on completion of all of the warehouses on the development. The occupiers may all want to join in and contribute. From a developer’s point of view, this will mean that it is not left with residual land it needs to look after once it has sold the last unit.
Sale or letting?
A decision will need to be made early on about whether to retain ownership of the warehouse and let it to an occupier as an investment or just sell it on and realise a capital return.
Letting the property to a tenant can be attractive, and it will be necessary to put a lease in place to regulate that occupation. This ensures an annual return, perhaps with rent reviews, and may well suit a business as paying rent is better for cash flow. However, note that most occupiers in warehouses want long-term agreements and may insist on protected leases, meaning that it is difficult to remove them on expiry unless you want the property back for your own use or intend to redevelop. Occupiers will want to be able to use the space as flexibly as possible in future, whereas developers may want to try and limit the way in which a warehouse is used if it has a particular category of user in mind, and it will want to retain the investment value.
A sale can be more straightforward, but it means a once-and-for-all capital receipt and no share in any ongoing income or uplift in value.
An attractive investment
Developing and investing in warehouses is not straightforward. Buying an established tenanted industrial estate, office block or retail and leisure scheme may be more hands off and easier to manage. However, the latter sectors are under strain and investors are offloading these assets. Warehousing stock is low and investors are not keen to offload these assets, so new-builds might be the only way forward.
While the attraction of constructing or investing in warehousing is clear, it is not for the inexperienced, and many areas need consideration and input from a range of professionals. The sheer size of some of the new warehousing being built and demanded by operators means that the projects and costs involved are huge. Hence the need for deep pockets to help fund the initial build.
The high values involved mean that it is high risk, and the categories of occupier will be demanding, but a good scheme will command high rents, attract quality tenants and create an attractive long-term investment for the future.
Ben Tarrant is a partner at Ashfords LLP
