By investment standards, sheds were once the unattractive cousin of the office and retail sectors. But this is no longer the case. With funds and investors looking to put their money into any kind of property, sheds have risen to join their trendier relatives.
So hot has the market become that the scrabble to buy industrial buildings has led to yields hardening at an accelerated speed. “Over the last six months, yields have dropped by 0.25%. That’s just mad behaviour,” comments one industrial agent. An average 10-year lease to a blue-chip institution is producing yields of 6.6%. Last year they were averaging 7.25%.
Also, dropping yields are provoking a rise in returns. IPD figures published last month saw London’s industrial market register returns of 17.5%, whereas returns on inner south-east industrial properties and distribution warehouses were 15.5-16%.
Retailer expansion
It is not only capital growth that is driving investors. Unlike other sectors, the industrial occupier market has remained healthy, driven in part by the expansion of retailers.
Richard Peace, associate partner in investments with Cushman & Wakefield Healey & Baker, says: “The demand for industrial product is strong and rents are showing good signs of growth. The market’s positivity is being driven by the lack of large sites.”
James Fairweather, investment partner with Strutt & Parker, says funds are being driven to increase their weightings in industrial properties because the sector has been one of the top performers over the past five years. “The distribution market has matured over the last couple of years as retailers and occupiers continue to take bigger units.”
Investors are coming in all shapes, sizes and nationalities, ranging from private investors, UK banks and US distribution companies. Small private investors band together and opt for leases of more than 15 years from blue-chip companies, but realistically, there aren’t many private investors paying into new developments.
The opposite is true of the larger UK funds that are willing to invest money where there is a greater margin of high returns. There has also been some unusual funding creeping into the sector. “Private syndicates offer prelet funding by way of a full commitment paid in advance,” says Fairweather, explaining that developers pay a rent from day one as if the property is up and let.
Joint ventures are the easiest methods for these funds to enter the development process and also to gain the expertise of the developer. “Because of the rising returns in distribution, if a jv provides more opportunities and less risk to the investor, then people are more interested,” believes Fairweather.
Peter Wittendorp, ProLogis senior vice-president responsible for global capital and fund management in Europe, says his company is being constantly approached by potential JV partners. “Not a week goes by without our UK colleagues being approached to take assets or to take part in a development scheme. But everything we do in Europe has to fit with our European fund.”
The American friend
Last August, Gazeley put together a joint venture with US firm Metlife to speculatively build the five units totalling 420,000 sq ft at Magna Park, Leicestershire. Strutt & Parker is retained as the investment agent.
Gazeley has done a fund deal with Standard Life at Purfleet on the M25 for the 489,000 sq ft Ultrabox single shed, which was completed last December.
JVs are also one way for banks to break into industrial investment. One of the most notable joint ventures was between developer Rosemound and the Royal Bank of Scotland. Last summer, RBS partnered English Partnerships to build 500,000 sq ft at Max Park, Corby.
However, the conclusion is that banks will become lenders, rather than specifically driving the development market. “Most banks are finding warehouses easy to lend on when they are let to a good covenant because vacant possession values are good, but I wouldn’t say they were pouring in,” says an unnamed agent.
The companies making the biggest foray into the UK’s investment development market are the developers, and it is the Americans who are creating the biggest splash. “Most of the backers for development in the UK are European or British, but I think there will be more US involvement because they are more likely to take a development risk,” believes Merryweather.
Americans are still interested, but they remain wary. CWHB’s Peace agrees. He says: “There will be more US developers trying to come across.”
AMB is being linked to the UK, which has a worldwide total of 2,800 customers in a portfolio totalling 1,106 buildings, comprising 109.1m sq ft.
Says Peace: “AMB is looking to get into the UK airports and warehousing sectors, and it has approached CWHB to find some sites.”
An AMB spokeswoman adds: “I can say that AMB plans to have 15% of its global portfolio in non-US markets by 2007.”
Panattoni, American’s second-largest distribution developers after ProLogis has shown an interest, but pulled out of its first UK deal last month. It was funding Equity Estate’s purchase of the 9.6-acre former Paynes Poppets factory on Croydon Road, Beddington, Surrey.
However, UK companies are still fearless. Mike Haig, Knight Frank’s industrial partner, enthuses that Congleton-based Gladman is currently the UK’s most prolific purveyor of large speculative warehouse projects. “They are one of the leaders of the funding pack, especially in the north of England.”
Gladman’s massive developments at Barlborough in south Yorkshire (500,000 sq ft) and Sherburn-in-Elmet in North Yorkshire (more than 1m sq ft) have set standards in the size, scope and appearance for industrial sheds.
With the market continuing to attract investors and finds of all sizes, it seems that 2005 will find many companies vying for space in the UK’s overcrowded industrial investment market.
|
|
|
As the biggest distribution facility company in the world, ProLogis continues to lead the way when it comes to financing distribution development. In February, the company launched a massive European fund. The ProLogis European Properties Fund has “priced a €389m commercial mortage-backed security (CMBS) taking in 44 European properties, owned throughout the fund and managed by subsidiaries of ProLogis”. Eight of those 44 properties are in the UK, although Peter Wittendorp, ProLogis senior vice- president responsible for global capital and fund management in Europe with ProLogis, was unable to specify which they were. It is the company’s fourth pan-European fund. All the profits from the new fund will go directly to ProLogis. Wittendorp says this is an advantage for those investing in the fund because when “a property doesn’t get leased then ProLogis is stuck with a non-performing asset”. Wittendorp has also revealed that ProLogis is close to considering setting up a specific UK fund within the next five years — especially now the market has turned round after what Wittendorp describes as “a sluggish two years”. “The UK is very important for CMBS products because of the high quality of prime stock. The UK also offers longer leases and is the best jurisdiction for legal enforcement. But before any UK fund is launched, Wittendorp says there is the “sterling” issue to consider. “We can’t take currency risk because we have exposure issues to consider. If our UK business grows as robustly as we hope, we will be discussing launching a fund,” he explains. |
