PRIME LOGISTICS the Definitive Guide to the UK’S Distribution Property Market
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PRIME LOGISTICS The definitive guide to the UK’s distribution property market Summer 2020 geraldeve.com 2 PRIME LOGISTICS CONTENTS Page Introduction 4 2019 highlights 5 Occupier demand 7 Supply 11 Development 16 Investment 19 Labour and occupier costs 24 Brexit 27 Brexit: freeports 32 Impact of Covid-19 36 The Gerald Eve regions 38 Avon & Somerset 40 Berkshire & Wiltshire 42 Buckinghamshire & Bedfordshire 44 Cambridgeshire 46 Gloucestershire & Worcestershire 48 Greater Manchester 50 Humberside 52 Kent 54 London East 56 London North 58 London South 60 London West 62 Merseyside & Cheshire 64 North East 66 Northern East Midlands 68 Northern West Midlands 70 Oxfordshire 72 Scottish Central Belt 74 South Coast 76 South Wales 78 South Yorkshire 80 Southern East Midlands 82 Southern West Midlands 84 Suffolk & Essex 86 Surrey & Hampshire 88 West Yorkshire 90 Glossary 92 Contacts 95 CONTENTS 3 WELCOME TO PRIME LOGISTICS 2020 Our Prime Logistics research has been providing the industry with detailed and impartial analysis of the UK logistics property market since 2006. Covering buildings over 50,000 sq ft in size, this spring 2020 research covers an entire property market cycle, drawing on 15 years of quarterly data across each of our 26 Gerald Eve regions. During this period of great uncertainty, UK prime logistics property remains one of the most liquid and sought-after of all property investment propositions. However, as is the case for all property sectors, the necessary imposition of lockdown and social distancing measures due to the spread of Covid-19 has had a profound and immediate impact on the logistics market. Unlike other sectors, this immediate impact took the form of a surge in demand from many occupiers. Food retailers had to increase warehouse capacity to deal with elevated demand as households stockpiled food. Online operators struggled to keep up with demand for home delivery. And, the industry came together to help support the delivery of vital supplies for the NHS. This crisis has highlighted just how crucial to the very running of the country logistics property is. Unfortunately, this surge in demand was not uniform across all occupier sectors. ‘Non-essential’ retailers such as high street fashion retailers and those linked to the hospitality industries have effectively seen demand fall away. Similarly, several manufacturers were forced to close plants faced with reduced demand and unsafe working practices. This crisis is also likely to magnify and accelerate several themes that were already growing in importance pre-Covid-19. Perhaps the most obvious is the faster and more widespread adoption of internet retail, which will feed into increased demand for warehouses and last mile solutions. However, some less obvious implications of the current crisis could be an increased emphasis on the use of technology in warehouses and the power and labour supply issues this creates, and, the potential deglobalisation of supply chains. Of course, we also have Brexit to contend with this year. So, with this in mind, we have taken a look at the potential impact of Brexit on the logistics property market and explored whether the increased adoption of freeports could provide some protection against any no-deal scenario. There is certainly a lot to for the industry to think about at the moment, so I hope this research arms you with some ideas of what to expect and how best to deal with it. John Rodgers Partner, Gerald Eve 4 PRIME LOGISTICS 2019 HIGHLIGHTS 47 7.1% 2.3% million sq ft taken up in 2019 UK availability rate (Q4 2019) UK prime logistics rental growth (2019) 49% 87 17.3 increase in development speculatively developed million sq ft under construction completions in 2019 buildings completed in 2019 at the end of 2019 £2bn 3.5% 1.8% Overseas net investment Average wage growth Prime rental growth forecast in UK industrial in 2019 in 2019 over next three years Whilst 2020 is now set to be a very challenging year, we are likely to see an acceleration of the themes which were gathering momentum in 2019, especially the more widespread adoption of internet retail and the increased demand for warehouse and last mile solutions this brings. 2019 HIGHLIGHTS 5 OCCUPIER DEMAND 47 million sq ft of occupational space was transacted Overall take-up remains high and occupiers continue to during 2019, which was 7% down on 2018, but comfortably demand high quality new space. Similarly, the average size above the 10-year annual average. of building taken-up (of all qualities) across the UK has not changed dramatically in 2019 and was 154,000 sq ft, down Even though some occupiers delayed decisions until after the marginally from the average 167,000 sq ft in 2018. December general election, the annual volume of demand in 2019 still ended the year just shy of the 5-year annual In 2019, almost 12 million sq ft of space between average. Considering the significant economic and political 50-100,000 sq ft was taken-up. This represents 25% of all uncertainty, the annual total was above expectations and activity, the same as the total volume of space accounted for indicative of the underlying health of occupier demand. by ‘mega sheds’ taken-up which are over 500,000 sq ft in size. Occupiers continued to take new and modern space in 2019, The smaller end of the market has long been the preserve with 54% of all occupier take-up involving either purpose- of manufacturing occupiers and historically, manufacturing built or speculative accommodation. This is reflective tenants have been the dominant occupier sector of these- of both the continued restricted supply of available new sized units. However, recently, and especially in good quality space and the bespoke nature of modern logistics occupiers’ secondhand or new units in London and the South East property requirements. regions, these have been increasingly favoured by logistics occupiers, keen to get a foothold into the London market. 7 million sq ft of speculatively developed space was taken- up in 2019, representing 15% of all annual occupier activity. Whilst there was in absolute terms less space transacted Occupiers in the retail and logistics sectors were particularly involving buildings over 500,000 sq ft in 2019 compared to interested in such space in 2019 as Amazon, Eddie Stobart 2018, the overall importance of mega sheds to total annual and Funko committed to some of the larger speculatively occupier take-up has not changed materially over the last few developed buildings. years and accounts for between 20-25% of total activity. However, collectively, the ‘mid-box’ market, covering buildings between 50-150,000 sq ft in size, was more Annual take-up by property quality important to overall demand in 2019 and accounted for and 10-year annual average, 2006-2019 Source: Gerald Eve 40% of total take-up. This is up on the 33% the mid-box market accounted for in 2018. million sq ft 60 The mid-box market typically caters to the expansion 50 activities of smaller occupiers and we have seen this segment of the market grow in importance to overall demand in 2019. 40 This may also be reflective of the increased supply of ‘mid- 30 box’ space which was made available to occupiers in 2019 – especially in terms of modern speculative development. 20 10 0 2011 2017 2013 2012 2019 2015 2016 2018 2014 2010 2007 2009 2006 2008 New purpose-built New speculative Secondhand 10-year annual average OCCUPIER DEMAND 7 OCCUPIER DEMAND (CONTINUED) Annual take-up by building size 2006-2019 Total annual occupier activity by event 2006-2019 Source: Gerald Eve Source: Gerald Eve million sq ft 000s sq ft million sq ft 60 180 60 160 50 50 140 40 120 40 100 30 80 30 20 60 20 40 10 20 10 0 0 0 2011 2017 2013 2012 2019 2015 2016 2018 2014 2010 2007 2009 2006 2008 2011 2017 2013 2012 2019 2015 2016 2018 2014 2010 2007 2009 2006 2008 50-100 251-500 101-150 500+ Letting Occupier Freehold Purchase 151-250 Average unit size (RHS) Pre-let / Pre-sale Development Land Purchase Since 2008, where straight letting activity (of both There were also a handful of large sales and leasebacks in 2019, secondhand and speculative space) accounted for over 71% as occupiers realised the value attached to their own long- of all annual activity, the market has now fundamentally term occupancy of a building. Sports Direct, Brintons Carpets shifted in favour of pre-lets and occupier purchases. and Brewdog all undertook sales and leasebacks in 2019, Forward-commitments have grown in importance over the transferring the ownership of the buildings to purchasers keen last 10 years and in 2019, straight lettings only accounted for to get exposure to the sector, whilst also retaining their own 49% of all activity. occupancy. This is a theme we could see more of in 2020 as occupiers, especially high street retailers look to raise cash. Pre-lets accounted for 27% of all occupier demand in 2019, down from the 33% in 2018. In a trend which we may see more Manufacturers were acquisitive in 2019, taking-up of over the coming years, occupiers chose in greater numbers to 12.4 million sq ft of space and accounting for 34% of total purchase the freehold of facilities for their own occupation, annual take-up. This was in large part due to Jaguar Land or, buy land on which to develop buildings for themselves in Rover’s commitment to locate their almost 3 million sq ft 2019. Several occupiers with a UK logistics portfolio now have logistics park at Appleby Magna.