Industrial property markets are improving
While manufacturing ouput in Europe has generally been declining for the last three decades, the sector is seeing something of a revival on the back of economic growth in Europe.
In the UK, the manufacturing sector is expected to grow by around 2.2% per annum over the next decade, the same level as the UK economy as a whole says a new report* from surveying firm Grimley, published jointly with the Royal Institution of Chartered Surveyors and the University of Reading. This reverses the post-War trend in which the manufacturing sector has had an annual average growth rate below the economy as a whole, and only 0.8% pa over the last 20 years.
There have been important changes in the nature of manufacturing over the past decade, with a growth in value-added production processes, particularly associated with foreign investment. “Alongside this there has been a significant shedding of excess space and a recognition of the need to improve the standing stock of floorspace,” says the report, “hence the levels of investment in buildings have, in real terms, been at record levels over the past decade.”
But much of this space is still owner-occupied. Some 58% of manufacturing space in the UK is owned freehold by the occupier, according to Jim Whelan at Grimley, locking up capital that could be used elsewhere in the business.
As businesses look more closely at their operating costs and cost of capital, they may conclude that they need more flexibility in their property holdings.
Developers are beginning to be more confident about speculative schemes. UK property company Slough Estates, for example, started construction last summer on 11,000 m2 of industrial and office accommodation in the Ruhr region of Germany, at Willich-Münchheide and Neuss. By October, Slough had signed pre-lets with Seiko and Hansaflex for 66% of the space at Willich-Münchheide.
Slough’s European manager Angus Scott-Brown says: “It’s true that there is not a lot of spec space being built; in the markets that we are active in in Germany, there is only one other developer producing anything on a spec basis.”
Even in Germany, where property markets are still weak, there are signs of rental growth for industrial property. Slough is letting its warehousing space at DM 9.80 per m2 per month, but Scott-Brown detects that the psychological barrier of DM 10 is coming under pressure.
German funds are keen to buy industrial property, and will consider yields as low as 7.25% for the best properties, but there is very little investment product on the market, adds Scott-Brown.
Net initial yields on industrial space in Germany range from 6.75% to as high as 10%, according to Jones Lang Wootton in its latest European Property Investment report. Business parks with a minimum of 50% warehouse/light assembly space are proving especially popular, but conventional distribution warehousing has traditionally been less popular with German investors, says the firm. They are, however, sought after by private investors and overseas buyers.
“We anticipate some medium-term enhancement in values for strategically-located distribution warehouses and high warehouse content business parks, as rents have bottomed out and in places are beginning to rise due to limited supply of good quality developments,” notes JLW.
Industrial rents in Germany range from DM 9.5 per m2 per month in Hamburg, to DM 13 in Munich.
In the UK, Bruce Bossom, deputy managing director of CIN LaSalle Investment Management, is enthusiastic about industrial property. The CIN pension fund, which is managed by CIN LaSalle, owns around £256m of industrial investments in its £1.6bn portfolio.
“Inherent obsolescence is minimal and there are low refurbishment costs, so not the same capital calls [as with offices or retail],” he says. The low rents mean that a small increase can nevertheless be significant to the value of the property. “An increase of £1 per sq ft on a £5 rent has a material impact,” Bossom says.
Industrial property can also have a tremendous amount of value locked away in the site. As towns expand and planning policies change, industrial land can be redeveloped further down the line for office or edge-of-town retail use. In Weybridge, Surrey, for example, CIN is embarking on a 20,440 m2 office scheme on a former industrial site.
Even without this potential upside, high yielding industrial property is attractive in the current low-interest environment, especially to US investors working with a high degree of leverage. Apollo and Pelham Partners teamed up with Spanish partners earlier this year to invest in the ZAL industrial zone at the port of Barcelona.
“You can buy modern industrial property, 10 minutes from the airport, off some pretty terrific yields,” says Pelham partner Roger Orf. “The cost of money in Spain is some 200 basis points lower than the property yield,” he says.
The investors have bought a 30-year lease from the port authorities and are banking on seeing internal rates of return of some 25% per annum. The investment is geared towards income rather than capital value. “Yields are never going to suddenly drop to 6% but we can just sit there and continue to clock up the income. You are not going to have a high level of liquidity, but it’s secure income,” adds Orf.
Pelham has also invested in industrial property in the Netherlands and the UK.
US investors are increasingly targeting European industrial property. Security Capital Investment Trust, the industrial arm of Security Capital Group, has opened an office in Amsterdam and is looking to buy a substantial European industrial portfolio.
American investors are always keen to try new concepts in Europe; the latest niche market in the warehousing sector is private storage facilities. Seattle-based real estate investment trust Shurgard Storage Centers has opened three facilities in France within the last year and is planning further outlets in Europe. In the US, the company owns 270 centres.
* The strategic and operational property requirements of the manufacturing sector. October 1997
