by Duncan Lamb
A year after Clive Lewis & Partners sounded the alarm over possible overheating in the retail warehouse market, the agents are again advising caution, but also highlighting the strong performance that the sector can produce.
The concern expressed in last year’s Midsummer Retail Report is borne out by the rent and yield data produced in the latest edition.
“There are now several schemes throughout the United Kingdom which, over the past 12 months, have struggled to secure tenants because the developer has either overestimated demand or rental levels, and these still therefore remain on the drawing board,” the report notes.
However, the agents are quick to add that if the same criteria that they espoused last year are adhered to — careful site selection, consideration of tenant demand — then there is still excellent potential in the sector.
“Rental levels are set to rise for the prime sites throughout the UK,” the agents predict, adding that the appearance of a different attitude to the valuation of retail warehousing assets can benefit only those with substantial investments in the sector.
“There has been a reluctance by valuers to account for reversionary rents in assessing capital values of retail warehouses.
“However, the South of Scotland Electricity Board Pension Fund’s recent purchase from Warbugs of a retail warehouse at Harlow, let to Texas Bulk at £4.26 per sq ft, shows a change of attitude. In showing an initial yield of 5.8%, it takes account of the reversionary rent of about £6 per sq ft.”
Analysis of rent and yield data in the report shows that combining rental growth with average investment yields for the sector implies total returns ranging from 8.5% in East Anglia to 22% in Wales.
The agents say that the average performance of 15% “compares favourably with total returns in other property sectors”.
For those institutional investors wishing to look beyond the warehousing scene, the agents say the time is right once again to buy shops in prime and secondary locations in cities and provincial towns.
“The £100 zone A barrier has now been broken in many of the major towns, and we expect rental growth to improve in these places.”
