Frenzied freehold activity has made it a tough year for industrial and distribution letting agents. A combination of low interest rates and the race to put properties into SIPPs ahead of A-Day has made all but the largest occupiers decide to buy their properties, driving sales of units and making prices rocket.
Land values have exceeded £300,000 per acre in Rugby Park, Stockport and Cromwell Avenue in Warrington, says Knight Frank. But can they go any higher, or is the market now at a tipping point, with buyers turning back into renters? The weight of opinion believes so. Local agents report that prices for 20,000 sq ft properties in the south of Manchester have risen from £65 per sq ft two years ago to £85 per sq ft today. For smaller units, they can be as high £100 per sq ft.
“Freeholds are flying out of the door. However, there is a question over whether prices are a bit too high now,” says Brian Birtwistle, DTZ’s industrial and distribution director. “If prices continue to climb, owner-occupiers will start to hold back, and they might revert to taking leases.”
That would be a comfort. Birtwistle says the leasehold market recently has been “hard graft”. Prime industrial rents have stood nearly still, at £5.25 per sq ft, since the end of 2001. By the end of 2005, they had risen only 50p per sq ft, to £5.75. “It is not an easy market, and there is still downward pressure on lease lengths,” he adds. On average, leases have dropped from an institution-pleasing 15 years to more like 10. In some cases, occupiers have been able to squeeze five-year terms out of landlords.
The first sign of the pendulum swinging back to rentals is a decline in the pressure on deals, says Colin Chivers, head of industrial at Jones Lang LaSalle’s Manchester office. “There aren’t any bargains to be had any more,” he says. “It’s becoming more of a negotiation. If occupiers want five-year break clauses, then there’s a penalty on the break, and you won’t get more than three months rent free. They’ve started to see that a 10-year package might be better.”
As a result, agents believe they will see rental growth, albeit in modest single digits, over the year ahead. “At the smaller end of the market, we’ve seen £6.50 per sq ft achieved,” says Chivers. “Outside that, rents of up to £6 per sq ft are being seen on most schemes, and we’ll be moving along to where we should be at £7 per sq ft over the next year.”
Some are making a virtue of the discounts. For example, work has begun on the speculative development of the 129,500 sq ft of warehouses at the ISIS scheme on Agecroft Commerce Park. Shepborough Developments, a partnership between Scarborough Development Group and Shepherd Developments, has started on two units that will be available in late summer.
Andrew Crowther, associate director at Scarborough, says: “We are quoting competitive prices in comparison with Trafford Park, and we are confident that this will give us the edge.”
The success of such developments is, of course, hugely dependent on the local economy. According to Experian, economic growth over the past year slowed in the North West, showing a rise of 2.3% against a UK average of 3.1%. Furthermore, over the next 10 years, the analyst predicts an average growth rate of 2.6% pa. Manchester’s inward investment agency, MIDAS, however, remains optimistic.
The agency’s business development manager for its logistics and distribution sector, Lisa Kean, is handling six inward investment projects, and another seven local companies are expanding in the logistics sector. They follow a long list of companies that have recently set up in Greater Manchester.
For example, the £4m expansion this year of Frans Maas’ site at Roundthorn Industrial Estate will more than double the haulage firm’s space from 14,000 sq ft to 32,800 sq ft. Kean says that retailer Next, electronic security equipment distributor Norbain, and medical care supplier Regent Medical have also expanded in the area.
Tameside council reports a similar success story. In the fourth quarter of 2005, it notched up 99 property-related enquiries. Of those, 13 found the space they required – and nine of these were industrial occupiers.
The style of logistics companies is changing. Kean reports strong interest from technology companies -something that MIDAS is keen to foster. “They cannot be ignored because of the quality of their employees,” she says. “IT creates a competitive advantage and provides sustainability in the logistics sector.”
Those that have already signed up for space include warehouse systems firm Chess Logistics in Trafford Park and, in Stockport, Intellident, which supplies radio frequency identification technology for firms such as Marks & Spencer.
“We are still seeing the 50,000 sq ft traditional warehousing occupiers, but we are also seeing a need for units of 20,000 sq ft, purely because technology companies require smaller office sites,” adds Kean.
That undoubtedly means more units and more smaller units at a time when the North West is getting its first “super sheds” (see box).
Finding sites to house these will continue to be a challenge, with the supply of stock beginning to tighten. DTZ’s Birtwistle points to new units at Kings Park, Ashburton Point and Centenary Point. “Those schemes are well over 50% let,” he says. “It won’t take long for the rest of the space to go – then where is the next new scheme going to come from? Land that could go to industrial is constantly being outbid for by office developers.”
Even traditional industrial locations, such as Trafford Park, are turning to offices. The park’s owner, Brixton, is planning 20,000 sq ft of campus-style offices in its first phase of development (see p107). “We are picking the crumbs from the table after all the high-end values have gone,” says Birtwistle.
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Development of super sheds is gathering pace in the North West (see table). More than 3m sq ft is in the development pipeline. Of this, however, only Barwood and Arlington’s 270,000 sq ft Big Sam in Bolton is in Greater Manchester. Locations such as Stoke, Stafford and Knowsley appear to be delivering more large units at the expense of Greater Manchester, where land supply is tight. But agents suggest that letting these big sheds could be a headache. Some question whether the investment market, rather than occupiers, is driving the market. A yield difference of half a percentage pointseparates prime stock and secondary units. Colin Chivers, director of industrial and distribution at Jones Lang LaSalle, says: “The strength of the investment market is casting a bit of a shadow. We’ve got anything up to 2.5m sq ft of stock coming out of the ground in the North West, and there is interest for some of it, but the demand for all is questionable. I think several schemes are fund led.” Chivers points to Gladman and Rosemound, which are building 1.2m sq ft on Merseyside (see table). “It’s a very brave move to build on that scale in the North West, and there will be a slight nervousness until we see one or two go.” |
