It is no surprise that industrial freeholds are back in fashion. As the overall property market improves sector by sector and region by region, so industrial freeholds have become more desirable.
But even if the improvement in the trading of industrial freeholds was to be expected, the extent of it has surprised the market. Steve Mitchell, director at Colliers, says the market for freehold industrial plots “has definitely bounced back”. Ben Wiley, head of national markets in the industrial agency team at Strutt & Parker, agrees. He says demand for freehold industrial property has “reached levels that many had not anticipated”.
A big part of that demand is within the M25. Wiley cites a string of deals this year, including Mercedes’ purchase of 6.8 acres in Langston Road Industrial Estate, Loughton; Chanel buying 3.6 acres at 12 Imperial Way, Croydon; and Access Self Storage investing in 2.8 acres in Bugsby Way, Charlton.
One of the features of these deals, says Wiley, is that owner-occupiers outbid other investors in each case. This underlines the fact that many companies want control of the sites they use, so they can make any changes they wish without reference to a landlord.
“Demand from owner-occupiers is primarily being driven by two factors,” Wiley says. “First, commercial property is seen as a good investment, and as many occupiers have remained inactive throughout the downturn they are now cash-rich and have money to invest. Rents are also increasing and incentives are moving in, so for occupiers with funds available, freehold is now preferable to leasehold. Second, it gives them greater control of their future and prospects for growth.”
It is not just in London and the South East that industrial freehold deals have recovered as the recession has receded. Jonathan Robinson, associate director in DTZ’s Birmingham office, reports a similar revival in the West Midlands. This summer’s deals include the purchase by UPS of four acres from Gazeley at Birch Coppice at a price understood to be around £400,000 per acre. The site was on the market during the recession but went unsold, probably because Gazeley was waiting for the right price, says Robinson.
Another factor that may have helped with the sale is that most of Birch Coppice is owned by IM Properties, whereas Gazeley controlled just a small part of the site. If it had held a larger amount of land, it might have preferred to hang on to the leasehold, says Robinson.
It is true that developers are routinely unwilling to sell land that they have not yet developed, for the straightforward business reason that they can make more out of it by selling a developed warehouse.
Robinson says: “Trader-developers will sell once they have built something, but some developers won’t sell even then because they prefer to hold on to the asset and manage it themselves.”
All of this makes a perfect formula to fuel the appetite for freeholds, so that the freehold industrial market now looks almost as robust as it did in 2007 before the market collapsed.
But anyone comparing 2014 to pre-2007 needs to note the differences as well as the similarities.
Richard Sullivan, director of industrial and logistics at Savills, says: “The market is different now, partly because of financing. Loans to value are much more sensible. You can probably get 60%-70% today against 80%-90% in 2007.”
Sullivan also agrees supply is more constricted than it was, again for a mixture of reasons – including the fact that the big owner-developers get good fees for asset management and so prefer to hold on to the freeholds themselves.
The big developers, such as Prologis, generally fall into this category. Alan Sarjant, who runs Prologis’s operations in the Midlands and the North, says that by and large the developer is “reluctant to sell” except in certain circumstances. This means that developers will usually offload only freeholds it regards as “non-core” or perhaps those where an owner-occupier agrees a development deal on the proviso that a freehold is the end result.
Sarjant adds that certain types of buildings also lend themselves to owner-occupier freeholds. These include parcel hubs, for example, where the land cost is disproportionately high because of the amount of parking required. This makes rents much higher per sq ft than they would be for conventional warehouses, which makes leases more complicated.
Typical of the parcel-hub type of freehold deal was the agreement between Prologis and UK Mail in February to develop a 231,000 sq ft head office and sorting office at Ryton. UK Mail was forced into the move from its old office in Birmingham because that site was compulsorily purchased for the HS2 rail line.
Sarjant adds that manufacturers are another category of business keener to own freeholds than most occupiers because manufacturing buildings “have to be bespoke and are key assets in their business”.
This is where there can be a tension between occupier and developer, either because an occupier holds out for a freehold or because an owner/investor refuses to give up the freehold to make a deal.
In these circumstances market forces take over. Sarjant says, for example, that Jaguar Land Rover would have liked to buy the freehold for the 225,000 sq ft speculative shed it took at Ryton in August, but that Prologis did not want that. But Jaguar Land Rover wanted the site and agreed a 10-year lease with a break at year five.
Sarjant says: “Often we can reach agreement on things like this but sometimes getting or not getting the freehold can be a deal-breaker.”
For Prologis, as for other several ?other big developers, a key part of its business is the investment portfolio, which will therefore always act as a brake on selling freeholds. A pleasant side-effect of this – for those in possession of freeholds – is that keen buyers and reluctant sellers are sure-fire tickets to rising values.
Beaver Industrial Estate
One part of the freehold industrial market that has become very strong is small units being offered by owner-occupiers. These are then often put into self-invested personal pensions.
The Beaver Industrial Estate in Southall, west London, is a typical example of a small unit estate that was built and sold on in just this way.
It was developed by a joint venture of Chancerygate and Helical Bar and then sold on to small businesses ranging from a vegetable wholesaler to an air cargo businesses.
The estate is now managed by Eddisons on behalf of a management company comprising all the individual freeholders.
Kabir Choudhury, a director at Eddisons, says many of the current freeholders were able to buy the sites because of the relatively cheap finance.
For developers such as Chancerygate and Helical Bar, selling freeholds in this way gives them money to re-invest in other projects. Choudhury adds: “They made a short-term gain here because the property market is fairly buoyant. They sold the lot. It’s part of a wider trend and we have been dealing with several more clients where freeholds have been bought.”
