Conspiracy theorists were proved wrong this summer.
A low level of dark rumblings during and immediately after the general election in May suggested that the Howard Davies-led Airports Commission would delay its final report on airport capacity in the South East and that the findings would be a fudge.
In the event, neither turned out to be true. Davies promptly delivered the 344-page report on 1 July, less than two months after the new government was voted in, and its recommendation was unequivocal: a third runway for Heathrow.
Perhaps the government had hoped that the rumours were true because, after a three-year respite, the spotlight is now firmly back on politicians to make a decision. And one of them in particular, prime minister David Cameron, may now be regretting his well-publicised comment in 2009: “The third runway at Heathrow is not going ahead – no ifs, no buts.”
In theory, the Davies report should be a shot in the arm for the logistics market at Heathrow and its west London hinterland, spurring investors to invest (see box) and developers to build out more space. But in reality, very little has changed on the ground. “It is business as usual,” reports Chancerygate development director Alastair King.
“The extra runway is possibly 20 years away – if it goes ahead. That’s too far off to have any real impact.”
Savills’ head of industrial research, Kevin Mofid, agrees. “It’s almost as if nothing has happened – transaction levels are the same, investment levels are the same. Occupiers are carrying on as if nothing has happened. There is another year of political wrangling ahead, so the market has probably made the right decision.”
If the government ends up agreeing with the Airport Commission, rather than backing a second runway at Gatwick (see box, below), competition for land around Heathrow will only intensify and questions are already being asked about where the extra logistics land will come from to meet the demand generated by a higher volume of air freight into and out of the airport.
Research by Savills (see below), based on current logistics stock and forecast air freight levels, suggests that more than 14m sq ft of additional logistics space will be required around Heathrow by 2030. “That would be after completion of the third runway,” says Mofid.
There is also the issue of what will happen in the intervening period, he adds. “In the medium term, there may be a surge in offices and some industrial land might come forward for office development. During construction, there will be demand for traditional industrial space from construction companies. In both cases, traditional Heathrow occupiers face either being displaced or having to pay higher rents.”
Deloitte Real Estate’s head of UK airport real estate, Samantha Hadland, says air cargo forecasts for the next five years are rising. “Luton could compete to take some of the air freight,” she says.
For now, though, occupiers appear sanguine about taking space around Heathrow. Earlier this year, DHL Express signed a 25-year prelet with SEGRO for a 150,000 sq ft warehouse on the airport’s western edge, on land that may eventually be required for the third runway.
One way that Heathrow could meet the likely future demand would be by developing more innovative logistics structures, such as double-decker warehouses, but Prologis’ head of London & South East markets, Paul Weston, does not expect to see them soon.
“We discussed this recently and decided against,” he says. “If it does happen, it will be around south Heathrow or Park Royal – it will need to be somewhere where rental levels are high.”
Investment near Heathrow
With land near Heathrow already at a premium, confirmation of the airport’s expansion could be expected to send values skyward. A month after the Airports Commission published its final report, media stories revealed that Prudential had spent £300m buying commercial assets near Heathrow in the months before the report’s publication.
Regardless of the decision, investors have been clamouring for assets near Heathrow. SEGRO has taken full ownership of 656,000 sq ft Axis Park, Slough (worth £144.9m); M&G gained all of 541,000 sq ft Heathrow Corporate Park (valued at £118.7m) and M&G has paid SEGRO £15m for 61,500 sq ft HCH House in Slough.
What about Gatwick?
The only other real contender for another runway in the South East, according to the Airports Commission, was Gatwick, which continues to operate with a single runway. Although rejected in the Davies report, some commentators suggest it might be politically expedient for the government to back a second runway at Gatwick, not least because of the prime minister’s previous pledge on airports (see main text). Should canny investors be buying up land around Crawley just in case?
Property people don’t think so.
“It would be a brave shout to do a large-scale, say 40-acre, development at Gatwick in the belief that the government will throw the Davies report out and go with Gatwick,” says Chancerygate development director Alastair King.
However, he admits the company would happily develop medium-range units in the area if it could buy the land.
And there’s the rub, says Colliers International’s head of industrial and logistics, Len Rosso: the Crawley market is just as tight as other parts of the South East. He points to a recent deal that valued land at up to £1.4m per acre, suggesting that rents would climb to £11 per sq ft (up from a previous high of £9 per sq ft) and approaching levels seen around Heathrow.
Rosso concludes: “Buyers may well want to take a punt around Gatwick, but they’re unlikely to find anything to buy.”
Air freight: key facts
| Airport | Volume (tonnes) | Percentage of all UK airports total volume |
|---|---|---|
| London Heathrow | 1,422,939 | 63% |
| East Midlands | 266,968 | 12% |
| London Stansted | 211,952 | 9% |
| London Gatwick | 96,724 | 4% |
| Manchester | 96,373 | 4% |
| All UK airports | 2,262,386 | – |
Source: CAA
Total amount of freight handled in UK (2013)
Air (all UK airports): 2.3m tonnes
Road (foreign-registered HGVs): 19.3m tonnes
Sea (international freight at UK seaports): 404.6m tonnes
Source: CAA, DfT
Warehouse rents around London Heathrow
Heathrow: £13.50 per sq ft
Park Royal: £14.25 per sq ft
Source: Savills
Logistics stock forecasts (m sq ft)
Heathrow 32.3 (2015) 46.6 (2030)
Gatwick 9.1 (2015) 16.8 (2030)
Source: Savills
