It has been like a massive round of Supermarket Sweep. South West shed developers have raced round trying to stuff their baskets full of food retailers’ mega-requirements. Now, despite the initial excitement, many of those bumper requirements seem to have cooled off. And with about 100 acres of land flushed out into the market by the supermarket run, there is concern about where demand will come from to spark development on these sites.
The rush began when Tesco decided to go ahead with a bespoke 480,000 sq ft frozen-food unit in Avonmouth, which was completed earlier this year.
That was followed quickly by: ASDA with its comically named Project Penguin for around 500,000 sq ft; the Co-op, which is looking for a similar amount of space in Avonmouth; and Morrisons, which has a long-standing requirement in the South West.
But according to whispers in the market, all those plans now seem to have either gone quiet, or the parent company has been distracted by expansion plans in other parts of the country.
As a result, says Russell Crofts, partner at Knight Frank, “the market continues to be very quiet. We had a big wave of B8 enquiries last summer, but the only one that has landed is Tesco. Everyone else seems to have messed around a bit.”
The absence of the big occupiers has a ripple effect, says Croft, as those looking to supply the supermarkets also put property decisions on hold. “We have probably got three or four decent occupiers in the 30,000-50,000 sq ft-plus range waiting to see what the supermarkets do,” he says. “They’re the people with fleets of vans and those that provide pallets, and they are just waiting in the wings.”
Good transactions
According to King Sturge, take-up for the first half of the year was 696,870 sq ft across the Bristol, Bath and Swindon markets (see p87) against a total of more than 1.5m sq ft in 2009, although Crofts says it will take only a couple of those big deals to land “and it looks like Christmas”.
Meanwhile, the fundamentals and sentiment for development do not appear to be getting any better. Charles Blake, development director at Gazeley, which signed up B&Q for the largest deal in the South West this year (see box), says: “The dynamic has changed – particularly in the past 12 to 18 months. There’s been a surge in the supply of land.” Of speculative development, he adds: “I don’t believe in it in this particular area. While there have been some good transactions over the past three or four years, they are not regular enough.”
Add in the fact that those with land have aspirations above and beyond where Blake believes the market to be, and product in the Avonmouth market is just “not cheap”.
“When the large deals have gone through the market, it will look like a very different place, and people will look at Avonmouth and see it doesn’t warrant having 100 acres of land,” says Blake.
Of course, with one of the year’s biggest industrial deals safely tucked under its belt, and with only two plots of land left to build on in Swindon, some might suggest it is easy for Gazeley to take this view.
A joint venture between Goodman and Severnside Distribution Land, on the other hand, has the largest industrial site in the South West – the 640-acre Central Park in Bristol. The jv says this is the only local site that can offer an industrial unit of up to 1m sq ft and, because of an historic quirk of planning, it has a long-standing consent that even today requires no additional planning application.
Responding to Gazeley’s prediction, Jason Dalby, Goodman’s managing director of UK logistics, says: “They would say that.” He adds: “We absolutely don’t think it is the end of the big deals in the South West.” But Dalby is far from saying market conditions are easy. “We’d love to say that [rents] will push up enormously, but I imagine they will stay flat and incentives will stay on the full side,” he says. “Most of the retailers have a strong covenant and know they can demand a strong incentive package.”
As a result, Central Park will seek to achieve rents around the current £5 mark, a figure that “absolutely makes our sums stack up”, says Dalby.
Local agents seem to agree. Jeremy Hughes, director of Bristol industrial agency with BNP Paribas Real Estate, thinks that Central Park will easily pick up a deal in the near future, but that Goodmans will take a view on quick transactions to get the park going.
But speculative development will take at least another year, he says: “If the take-up rate continues the way it is going, then towards the end of the year it might be worth considering. Someone would be rewarded, but they would have to be quite brave and wealthy. Most people are scared stiff they are going to end up with egg on their face.”
Gazeley turned heads this June when it signed up the biggest South West industrial letting for a year. B&Q took almost 800,000 sq ft at G.Park in Swindon as a design-and-build project.
Gazeley’s speed was a big driver in the deal, says development director Charles Blake, with B&Q demanding to be in the facility and operational by June next year.
“B&Q knew we could deliver the unit because it had seen what we’d done for Warburton,” says Blake, referring to the 116,000 sq ft deal signed with the baker at G.Park Western Approach in autumn 2008. “Warburton needed its bread going out of the factory by the end of August 2009.”
Blake refuses to divulge the details of the B&Q transaction but, as a guide, he says the end value of the project will be £70m.
Two plots are left at the Swindon park, which could accommodate 120,000 sq ft and 440,000 sq ft. At the moment, the developer will wait and see what the prelet market produces, says Blake. “We’ve found that having land is more advantageous than having speculative buildings.”
He adds: “Some occupiers are continuing to do things, and some are looking to take advantage of prices, particularly on the speculative market, and we’ve seen a lot of cheap rents to get buildings occupied.”
