Fingers are poised. Green-for-go buttons are ready to be pressed. In the few weeks before business closes for Christmas, as many as 30 proposals to forward-fund warehouse developments are expected to go before UK institutions’ approvals committees.
Many will not survive the encounter. Some, undermined by wobbly appraisals, were effectively dead long before they reached the meeting. But several – perhaps a dozen or more – will get the go-ahead. Expect a fanfare of pre-holiday announcements and loud predictions of a wild 2015.
The return of red-blooded forward-funding to the logistics property sector after a six-year break is momentous. It signals renewed confidence and the (insatiable) appetite of investors to buy into warehouse floorspace. But will it mean millions of square feet of new speculative floorspace? Probably not.
For a glimpse into the private world of the approvals committee, look to the North West. The region’s strictly limited supply of good new units in all size ranges, and steady demand from retailers and e-tailers, makes speculative development increasingly appealing. Funders are said to be circling half a dozen serious potential forward-funding deals amounting to about 1m sq ft.
Andrew Dickman, managing director of Manchester-based Barwood Developments (North), is shepherding two schemes through the approval process. If both get the green light, it will mean 375,000 sq ft of new warehouse development in the North West.
Decisions on both projects – a 200,000 sq ft Merseyside development at Knowsley and a 175,000 sq ft warehouse at Wigan – will be made before Christmas.
Dickman says: “We are contemplating both the Wigan and Knowsley developments. Logistics managers want certainty on when they can get into a building, and that means building it and getting the site operable quickly.
“Forward-funding is appealing to the UK institutions because they believe there is a very limited supply of good new buildings. They know because they have tried and sometimes failed to buy them. Now they are comfortable with the supply-and-demand dynamics.
“The result is that we’ll hear lots of talking about speculative development but, in the end, only three or four developers will actually do it in the North West. It’s first-mover advantage – the first into the market will make it difficult for the others, who won’t want to be the last.”
Paul Cook, Manchester-based director at CBRE, adds: “There is so little new warehousing available that occupiers now have to go to locations some way off pitch to find new premises. Today there are as many as 15 or 16 sites being talked up as potential speculative warehouse starts, but I don’t expect more than five or six of them to get the go-ahead.
“The funds want to get deals signed before Christmas if they can. They are in a hurry.”
As well as the Barwood schemes, market sources point to a series of developments, including the BA Pension Fund, understood to be on the brink of funding a 190,000 sq ft warehouse at Chorley, and a potential 210,000 sq ft warehouse at Rochdale’s Kingsway site.
The pattern in the North West will be repeated elsewhere, says Richard Merryweather, joint head of UK investment at Savills. A few bold, early movers will snatch the forward-funding opportunities, while others – perhaps disappointed that their own plans have not moved more quickly – will watch and bide their time.
“I think we’ll see forward-funding leading to isolated speculative development,” says Merryweather. “Most funds might consider one or two developments, but nobody will be doing it en masse. Speculative development will be relatively limited because tenants and investors are both happy to wait for prelets.”
Merryweather predicts developments in the 250,000-500,000 sq ft range – mainly single units targeting known local demand.
“There’s not going to be a vast amount of forward-funding, even though there is a vast amount of money making its way into existing industrial property, into standing stock,” he says. “The fact is that the number of developments available for investment on sites good enough to justify the risk are few. The over-development of the mid-Noughties is still in people’s minds. It’s a strong memory, so there is no immediate appetite for risk.
“The majority of logistics deals over 100,000 sq ft are always prelets, and that will continue to be the case.“
Could the prospect of rental growth – and yield compression – in the logistics sector tempt potential forward-funders to press their green-for-go buttons? M&G Real Estate’s chief number-cruncher, Richard Gwilliam, suggests that enthusiasm will enjoy only a modest boost.
M&G says rental growth – nominal, if not perhaps real – will return to the UK industrial sector.
Gwilliam, head of property research at M&G, says: “We’ve already seen a rental recovery in London and the South East over the last 18 months, and this will continue. The industrial sector is not going to shoot out the stars on rental growth – it’s likely to be single-digit percentage growth, but in core locations in London and the South East, we could see growth of 4-5%, which, in the context of the industrial market, is good.”
Is this enough to tempt forward-funders into backing speculative development? Gwilliam says it might be – for some people, in some places, some of the time.
“Lack of supply of new development will keep a lid on growth,” he says. “But developers are still risk-averse, and it’s not like there are no risks in the UK economy, so it’s unlikely anyone will go all-out for speculative developments. We will still see far more prelets, so the market will still be led by demand.”
With £2.7bn invested in the UK industrial sector in the first half of 2014, according to CBRE, and the second half likely to be just as strong, a naïve observer might expect the competitive pressure for the best assets to push many potential buyers into forward-funding. But Gwilliam urges caution.
“Yes, forward-funding could be a route into prime industrial properties for some buyers, because it means they are not competing with other investors on ever-lower yields, and the building can be tailor-made for the end tenant,” he says. “It is getting more appealing, but it carries risk, even though I expect investors’ risk appetite to grow. But if you get a prelet, then that is fantastic – and this will still be investors’ and developers’ preferred route.”
