B&Q’s Redhouse Interchange in Doncaster is a hot potato. In the final days of 2003, Scarborough Development Group scored one of the largest investment deals in Yorkshire. It negotiated the sale of B&Q’s Doncaster distribution hub to Sydney & London Properties for just under £40m, a yield of 7%.
But by the summer, the 800,000 sq ft shed had changed hands again, with Propinvest, backed by private money, paying £42m, representing a yield below 6.5%, and making Redhouse once again the largest deal to hit the Yorkshire market. But it did not stop there. Just last month, the UK’s largest distribution unit was put on the market again.
Repackaged and revitalised, it is now part of Propinvest’s Hardwick portfolio, a two-property package that includes Rolls-Royce’s 540,000 sq ft property in Glasgow, with a hefty price tag of £101.5m, reflecting a net initial yield of 6.3%.
Yield compression is, of course, nothing new to the investment market – least of all in Yorkshire’s industrial sector, which has seen yields drop dramatically over the past few years. The IPD now quotes an average yield in the region of just below 8%. But Hardwick’s figure blows this out of the water. Redhouse’s credentials are spotless. It has a 20-year lease to B&Q at a rent of £3.60 per sq ft, a fixed uplift at the end of the fifth year and another in December 2013. A similarly good deal is in place at Rolls-Royce.
Started whispers
Still, the speed at which the B&Q unit has been recycled, and the structure of the portfolio – which will see Propinvest top up rent to the next fixed uplift in four years’ time – have started whispers that the top of the market is approaching and the long anticipated selloff could have started.
Topping up rents so as to lift a property’s capital value is becoming more popular. Gareth Gibbs, director at Colliers CRE’s Leeds office, says Propinvest is not the only one taking advantage of the yield compression and Doncaster’s growing kudos as a distribution location.
“A lot of people are looking at taking advantage of the current yield shift, which they don’t think will be there in four years’ time,” he says. “Many think we are at the height of the market and thus are happy to top up in order to capitalise on the hard yields.”
Profit creation
So many agents think the Hardwick portfolio is a shrewd piece of profit-taking by Propinvest. Tim Cameron Jones, director and head of DTZ’s Leeds office, believes that while the offer looks expensive, there will be plenty of takers. “It’s a clever bit of profit creation,” he says. “It is a hot price, but the market is very keen, and both properties are fantastic bits of kit.”
He adds: “It might go to a debt-driven buyer but I think, at over £100m, it will have to be someone with a big appetite, and one of the big funds will probably take it.”
As a result, agents remain ebullient about prospects for higher prices and harder yields. Add in Knight Frank’s forecast that rents in Yorkshire could rise by 25p over the next 12 months to £4.25 per sq ft, and the Bank ofEngland’s warnings over the growth in lending in the commercial sector seem a long way away.
Foreign cash may have shied away from the region’s investment market but, according to the IPD’s Yorkshire and Humberside performance index, the appetite of UK institutions has ensured total returns in excess of 19%. That is against a UK average of 16.9%. Of this, the lion’s share of growth was supplied by capital growth, which doubled over the past 12 months (see graph).
And it shows no signs of stopping. If the Hardwick portfolio created a degree of shock and awe in the Yorkshire industrial market, then a couple of deals in the pipeline could put Hardwick in the shade.
Rumours are flying around the Leeds agents’ offices of “an incredibly racy yield” on Somerfield’s 570,000 sq ft unit at Sherburn-in-Elmet near junction 44 of the A1(M), which was sold to Hamilton Sherburn Syndicate in 2001 for £28m as part of a sale-and-leaseback package.
In addition, the sale of Gladman’s Balborough Links scheme, let to supermarket giant Tesco on a 10-year lease at £3.75 per sq ft, is in solicitors’ hands. It is believed to have been sold to a UK pension fund at a yield in the region of 5.75%.
So will Yorkshire see another sub-6% deal? “I think we will see another one before the end of the year,” says Justin Garnett, director at Jones Lang LaSalle.
“Balborough was let to Tesco, and that covenant is almost better than government. Despite this, the weight of money in the market, and the fact that we’ve seen an upping of gears across the board, whether that is private investors or the institutional market, means we will see another.”
The perennial problem of stock also seems to be becoming less of an issue, with sellers emerging at a disquieting rate. Colliers’ Gibbs points to Prudential, which last year was one of the top selling institutions in the market.
More sellers
“There are more sellers around, and a lot more institutions are bringing out quite large portfolios,” he says. “There’s long been the complaint in the market that if we sell, what are we going to replace it with, so we’ll hold. Well, now they are suddenly starting to think maybe we’ve done that for a bit too long.”
Whether Yorkshire and the wider investment market are reaching the top is hard to call. But you can expect to see plenty more hot potatoes as investors chase each other to the top of the market.
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Desperate investors have turned to desperate measures. After complaining for some time about the lack of stock, Yorkshire’s industrial investors are taking matters into their own hands and have started speculatively funding distribution units. Justin Garnett, director at Jones Lang LaSalle, is one who has noticed the growing trend. “I’m now having conversations with institutional investors on potential speculative funding,” he says. “Developers are happy, as someone else takes all the risk, and investors are getting a discount up front on the yield.” Garnett says the trend has largely been at the smaller end of the market, with the availability of cheap lending driving owner-occupiers who are keen to buy their own 1,000 sq ft of property. But big name developers are also reacting to the hot market. St James Securities is looking to develop a couple of 100,000 sq ft units at Centreport, near Goole, and, given the strength of the market, it says it will look at a speculative funding package. However, Henrie Westlake, Leeds-based partner at Knight Frank’s investment team, issues a note of caution: “When investor demand is such that we are looking at speculative funding, you know we are approaching the top of the market. In fact, it is probably galloping over the horizon.” Yet he adds: “The weight of money will continue. The stock market fails to deliver consistent results, and we aren’t seeing the returns because there has been so much yield compression. ButI don’t think we are overpriced.” |
