The sheds market is having its moment in the sun, with funding pouring in, requirements multiplying exponentially and yields at all-time lows. At the heart of this is the prospect that famously sticky industrial rents are on the move – a desperate lack of supply and surging automotive and e-tailing sectors having placed landlords firmly in control. The market has had no choice but to respond, if tentatively.
The figures paint an undeniable picture. Availability has fallen by 62.4m sq ft across the board, 16% down in the North West, 21% down in the West Midlands, and East Midlands, 30% down in London and 25% down in the South East, according to Lambert Smith Hampton’s March research. Take-up across the board rose by 22% to 92.6m sq ft from a disappointing 2012.
Below-par stock scrapped
Now just four months of grade-A stock remains, both as occupiers’ feet start to itch and as below-par stock is scrapped to make way for new space. Though deeply uneven, the IPD sees industrial rents rising by 0.7% through 2013, making up for a loss of 0.7% in 2012.
Simon Lloyd, head of industrial and logistics at DTZ, says the agency is basing its decisions on a 1.5% compound rise each year for the next five years. “It goes in step changes, not increments, but net effective rents have been rising for a little while for better stock. Perhaps by 2% in the mid range and the top of the market. The industrial market went into recession first and has come out first.”
In the past year incentives have been edging in, and there’s now little room for manoeuvre, with typical rent-free periods half of where they were a year ago. Nick Waddington, national head of industrial and logistics agency at BNP Paribas Real Estate, detects a clear trend. “Incentives can’t now come in a lot more, especially west of the M25, where there is no land available or in the big box Midlands market. Twelve to 18 months ago landlords were desperate to keep the tenants – now they’re able to offer a deal to a tenant knowing they can go to another to try and get the rent they want”.
This masks huge regional variances. Sheds near Heathrow and Park Royal as ever lead the pack , with prime stock commanding headline of £12 at the former and £13.50 at the latter, according to Aspect Property Consultants. This reflects an increase of around £2 every five years at Park Royal, driven by a residential boom that is sapping London’s land supply. Slough rents have reached £12, according to LSH, shooting up 20%.
Reading and Guildford continue to perform strongly, as do most locations in the South East, East and West Midlands. Scotland and the North East were the only regions to slip in secondary rents, while the North East experienced the only decline in prime rents. Many of these areas had more take-up in 2013 than there is available space (see box).
Most of the buzz is focused around the 50,000 sq ft to 100,000 sq ft bracket, which typically sees higher build costs and LSH says experienced a take-up uplift of 56% last year. Only around 40 grade-A sheds exist in this category, with stock depleted by nearly a third in 2013.
Savills director Richard Sullivan echoes this sense of a focal point: “50,000 sq ft is where everybody’s seeing a lot of activity. If you want more than 50,000 sq ft you’ll be pushing rents and doing prelets, there’s virtually nothing on the market. And under that you’ll be seeing tougher terms for tenants and less choice for occupiers.”
LSH head of industrial agency Alex Carr agrees: “We’re now getting rents on a par or better than 2006 and 2007 on certain actively managed multi-let estates. The general supply is now to the point where occupiers don’t have any choice. Even in 2008 people weren’t building this sort of kit”.
Reliability of trends
Rental growth may be rearing its welcome head, but it has always been a fickle animal. So how reliable are these trends? Part of the equation lies with the wider economy. Andy Preston, industrial properties manager at London & Cambridge Properties, says the growth is not just about the volume of demand, but the quality of it: “Two to three years ago it was about functional property at the lowest cost, now they want something they can invite clients to, and accept they have to pay more for that.”
Others don’t set quite so much store by so-called catch-all solutions as e-tailing. Knight Frank research associate Oliver du Sautoy points out that some online markets, such as books and electronics, are close to saturation for their sheds requirements. Others, like supermarket retail, are more about a battle for market share than a profitable sub-sector.
Nevertheless, fund managers and institutions are scrutinising UK logistics for green rental shoots like the indicators they see in Europe’s most transparent market.
Figures like the Office for National Statistics’ prediction that e-tailing will increase from 12% of retail today to 20% by 2020 only whet appetites, while manufacturers’ body EEF predicts a 2.7% growth in manufacturing this year.
Legal & General senior fund manager Jonathan Holland views industrial as one of the strongest performers in the next five years, with capital returns all due to rental growth driven by new demand and stubbornly low stock.
“Landlords will have to change their strategies from income protection to income growth. Rising build costs and a limited supply of suitable land, particularly around London and the South East, will add to this tension.”
Delin Capital chief executive Christian Jamison says he is “taken aback” by appetite from banks, debt funds and insurance companies which may have been slow to catch on but increasingly like what they see in sheds. He sees a “dumbbell” approach, with very large units and smaller “last mile” hubs attracting particular interest.
M&G fund manager Dermot Kiernon describes industrial as a “favoured sector”, and is devoting 20% of M&G’s UK Property Fund to the area.
He says: “We see industrial as one of the strongest-performing sectors for the UK, there are subdued levels of construction, and turning on that supply tap can happen more quickly than elsewhere.”
But the waters are murky, and what emerges out of such uncharted territory is anyone’s guess. With the funds on board, the agency community seems certain ripples of rental growth are appearing in the water.
