Market Overview
RELATING TO LAND TO THE WEST SIDE OF MICKELFIELD AT WARREN FARM, IMMEDIATELY SOUTH OF PECKFIELD BUSINESS PARK
Prepared on behalf of Network Space Ltd
By Colliers International
11th June 2018
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TABLE OF CONTENTS
1 INTRODUCTION 3
2 EXECUTIVE SUMMARY 4
3 SITE OVERVIEW 6 3.1 LOCATION 6 3.2 STAFF CATCHMENT 6 4 MARKET OVERVIEW 8 4.1 NATIONAL CONTEXT 8 4.2 LOCAL MARKET 8 4.2.1 GENERAL OVERVIEW 8 4.2.2 LEEDS MARKET 8 4.2.3 SUPPLY STORAGE – EXISITING STOCK 9 4.2.4 STORAGE OF SUPPLY – EXISTING SITES 10 4.2.5 DEMAND 11 4.2.6 RENT & YIELDS 12
5 SUB MISSION DRAFT SITE ALLOCATIONS 13
5.1 MARGINS BETWEEN SAP AND CORE STRATEGY EMPLOYMENT LAND TOTALS 13 5.2 LACK OF FLEXIBILITY AND CHOICE OF SITES 14
APPENDIX 1: SUMMER 2017 EDITION OF COLLIERS INTERNATIONAL’S UK INDUSTRIAL MARKET COMMENTARY
APPENDIX 2: LIST OF AVAILABLE NEW/MODERN INDUSTRIAL PREMISES OVER 100,000 SQ FT
APPENDIX 3: ‘FROM SHEDS TO SHELVES’ – A REPORT BY COLLIERS INTERNATIONAL (OCTOBER 2015)
APPENDIX 4: COLILERS INTERNATIONAL’S UK INDUSTRIAL MARKET BAROMETER – SUMMER 2016
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1 INTRODUCTION
Colliers International have been asked to prepare a market overview for the commercial property market as it relates to the allocation of the land known as Warren Farm situated immediately south of Peckfield Business Park, to the west side of Micklefield village which is located to the east of Leeds.
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2 EXECUTIVE SUMMARY
The subject site is located immediately adjacent to an established existing employment business park in a strategic location with excellent transport links.
The industrial property market is suffering from a general shortage of supply of good quality industrial units, both existing and new-build, partially due to the loss of land to residential and other higher value uses.
In the West and South Yorkshire markets, traditionally a hot spot for industrial development within the UK, the shortage has meant that there are currently no good quality industrial units available over 200,000 sq. ft., potentially stifling economic growth.
Population centers close to Leeds which have in recent years effectively provided its supply of sites for large industrial units are themselves suffering a general employment land shortage and those sites now being allocated for future development tend to be further away from Leeds.
Leeds is a major industrial area with established supply chains, business infrastructure and a large pool of skilled labour. The location has demonstrated its ability to attract a wide range of industrial companies recently, but is now lacking the supply of larger sites capable of taking larger floor space requirements which we demonstrate are locating away from Leeds, to locations where they can be accommodated.
We find that the nominal difference between the SAP and Core Strategy general employment land requirements don’t reflect:
o That the 493 ha Core Strategy requirement is a minimum requirement.
o It lacks the flexibility to accommodate any changes in economic circumstances, in particular there seems to be no recognition of the potential requirement for increased demand as a result of the massive changes resulting from online-retailing and e commerce generally and also the recent increases in take up by the manufacturing sector, all of which are fundamentally changing the dynamics of the industrial property market in a positive way.
o The potential loss of land due to various infrastructure projects, proposed and in the pipeline. HS2 in particular is likely to lead to a significant loss of development land and may result in delays in other land coming forward for development, potentially beyond the 2032-33 scheduled line opening date
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o Leeds is a major centre for manufacturing, warehousing and distribution based companies and its wider strategic location is significant in terms of serving the larger population centres to the west and the south of Leeds and the wider markets in the North West and North East of England.
o The lack of allocated sites capable of accommodating 200,000 sq. ft. plus industrial requirements. We demonstrate the market for such enquiries and yet, without the allocation of the subject site for general employment use, there are only three other sites in the wider Leeds area capable of accommodating such requirements with the only other suitable location for most general enquiries being located on the Wakefield district border at J30 M62. This lack of choice risks stifling take-up and losing businesses and employment to other locations.
The allocation of the land for employment use at the subject site is, in our opinion, vital to maintaining an adequate supply of industrial development land during the plan period and also to securing a degree of choice and flexibility in the range of options for potential occupiers, crucially in the case of companies seeking premises over 200,000 sq. ft. in size.
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3 SITE OVERVIEW
The subject site is situated adjacent to an established general employment site and could offer a strategic industrial and logistics location for medium and large scale development which is currently extremely limited in the Leeds area.
The site’s attributes are its strategic location adjacent to an established Business Park, enabling excellent connectivity via Micklefield Railway station and the M1 and A1 (M) motorways providing the accessibility to a large labour pool, and the scale to offer large scale building footprints.
3.1 LOCATION
In terms of its location, the subject site is strategically positioned approximately 10 miles to the east of Leeds, 2 miles south of Junction 47 M1 and 3.5 miles north west of Junction 42 A1(M), providing excellent access to the national motorway network. The site provides excellent access to the wider Northern Powerhouse area from the major ports at Hull and Immingham in the east, to Greater Manchester and Liverpool’s Superport development in the west. Access to these facilities are of key significance to distribution operators, manufacturers and other companies importing and exporting their goods and increasingly to retailers selling goods over the internet. The subject site occupies one of the best locations of any large site in the Leeds City Region given its proximity to the motorway network and access across the North of England.
At a regional and local level, the site is easily accessible to Leeds City Centre (20 minutes) and to the other main regional centres of Wakefield, Bradford, Huddersfield and Halifax.
3.2 STAFF CATCHMENT
As a result of its excellent accessibility, the subject site can draw on a wide range of staff both from the local population to the east of Leeds but from much further afield given the road links described above as well as good public transport access by bus and by train (via Micklefield Station).
Staff availability has become an increasingly important determinant for companies looking to move location.
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4 MARKET OVERVIEW
Our focus in this section will be on the industrial and logistics market as this is likely to be the sector from which most market demand (by volume of space) at the subject site is likely to come from. However, this is not to ignore potential demand for other employment generating sectors, nor the absolute need for any modern business park to incorporate a range of facilities for staff and to support the businesses working from the development.
4.1 NATIONAL CONTEXT
In Appendix 1 to this report we enclose the Summer 2017 edition of Colliers International’s UK Industrial Market commentary. This document considers the economic backdrop to the market, occupier demand and take up, the supply of stock, rents, land values and future forecasts.
In summary, this research report forecasts a positive outlook for the industrial property sector up until 2020 due to a shortage of quality property availability and strong demand, with the latter supported by rising online sales and an export friendly exchange rate. The shortage of available property is likely to see rents increase at a faster rate than the other main property sectors.
Against this background there is a shortage of development coming into the marketplace and our researchers note that ‘Competition from residential developers and other land uses is pushing industrial to the back of the queue. They go on to state that ‘Even though the e-commerce sector continues to boom…. the next few years may prove challenging. The lack of accessible land in high population areas already presents challenges to finding suitable facilities for last mile deliveries.’
4.2 LOCAL MARKET
4.2.1 GENERAL OVERVIEW
Leeds and the wider West Yorkshire Region has traditionally been one of the UK’s main hot spots for industrial development activity, due in the main to its position towards the centre of the UK, its excellent transport links, its sizeable labour catchment and its competitive cost base. The area has always possessed a supply of ready to develop large sites and a supply of existing built stock available for occupation.
However, this position has changed in recent years with the choice and range of new developments and existing stock declining significantly. This has been particularly so in Leeds, the largest business market in the region, which has in recent years tended to rely on the employment land supply in adjoining local
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authority areas, mainly Wakefield, to provide the industrial floor space necessary to serve its fast growing economy.
Industrial land supply in these adjoining areas is now also becoming constrained. For example, at Wakefield Europort, for many years the main source of the regions new industrial buildings supply, the site is now virtually full developed. Those sites which are being brought forward in adjacent areas are now further away from Leeds (for example at Normanton and Pontefract) and are less able to serve the Leeds business market either in terms of existing companies wishing to grow and expand or companies looking to move in to serve the area.
4.2.2 LEEDS MARKET
The shortage of development opportunities is particularly noticeable and is prevalent at a time when demand in the industrial and logistics sector is increasing.
Examples of recent key transactions specific to Leeds are detailed below:
Table 1: Key 100,000 sq. ft. + transactions – Leeds Jan 2015 – June 2018 Company Location Size (sq ft) Date L&G Homes Sherburn 556,000 Feb 2016 Dixons Carphone Leeds Bradford Airport 422,000 March 2017 Amazon (UNDER OFFER) Logic Leeds 362,000 TBC Premier Farnell Logic Leeds 361,000 Jan 2018 Caddick Whitehall Road 188,000 Aug 2017 Jabe Foods Birstall 140 142,000 Jan 2015 Buy it Direct Transpennine 62 126,000 April 2017 Cubico Oakwell 27 111,000 Jan 2017 Denotes brand new/design and build
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Key deals over 100,000 sq. ft. totalled c. 2.27m sq. ft. from Jan 2015 to June 2018, of which only 1.28m sq. ft. were new/design and build units.
By contrast, those same size transactions in the wider region totalled c. 5.79m sq. ft., of which 4.17m sq. ft. were new/design and build units, showing large scale take up occurring in locations where allocated land is in greater abundance to accommodate the increasing trend for larger manufacturing and distribution premises.
Examples of these key transactions for the wider Yorkshire market over the same period are detailed below:
Table 2: Key 100,000 sq. ft. + transactions – Yorkshire (excluding Leeds) Jan 2015 – June 2018 Company Location Size (sq ft) Date Amazon iPort Doncaster 1,100,000 Aug 2016 Lidl iPort Doncaster 686,000 Feb 2017 TK Maxx Crosspoint 33 638,000 June 2015 Knottingley Clipper/Pretty Little Things Sheffield 615 615,000 April 2018 Poundworld XL 62 Normanton 524,000 June 2015 Bibby G Park Wakefield 282,000 Nov 2015 Amazon V246 Doncaster 246,000 Aug 2015 CEVA Logistics iPort Doncaster 216,000 Aug 2016 Amazon iPort Doncaster 215,000 Aug 2016 Barwick Bathrooms Hollingwood 200 191,000 Jan 2018 Bradford ASOS Westmoor Park 191,000 May 2018 Doncaster Allied Glass Eurohub Wakefield 189,000 Jan 2017 Nisbets BC Bank Doncaster 145,000 Jan 2016 Fellowes iPort Doncaster 143,000 April 2016 Howdens Strata Doncaster 137,000 July 2015 Amazon Victory Park Sheffield 136,000 June 2016 Symphony Group Mountpark Wakefield 133,000 Jan 2018 Denotes brand new/design and build
4.2.3 SUPPLY SHORTAGE - EXISTING STOCK
The shortage of supply commented on above has reached a critical level in that there are now no new/modern industrial units available over 200,000 sq. ft. across either the West Yorkshire or South Yorkshire markets. This represents a significant economic issue in terms of those larger companies in the region seeking to expand their operations or companies looking to move into the area. However, at the same time it presents an opportunity for developers with sites
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able to accommodate development of larger industrial units to attract such occupiers form outside the region where supply of such units is also limited.
Colliers International are aware of two industrial requirements (company details confidential), one for circa 500,000 sq. ft. and one of 650,000 sq. ft. where the lack of availability of currently deliverable sites in West Yorkshire is leading them to look further afield and consider relocating outside West Yorkshire even though this is not ideal for their respective businesses.
In Appendix 2 to this report we attach a list prepared by Colliers International of the availability of new/modern industrial premises over 100,000 sq. ft. in size. With regards the existing stock of industrial premises it should be noted that a significant proportion is older property which because of its technical specification or its state of repair isn’t suited to the needs of modern businesses. As a result, some of these properties are being converted to new uses or are being demolished to make way for new development. This represents a further loss of standing general employment stock.
4.2.4 SHORTAGE OF SUPPLY - EXISTING SITES
As discussed earlier, availability of sites for industrial development is generally being constrained by competition from residential developers and for other higher value forms of development. As a result, potential industrial development opportunities are in some cases not coming forward, landowners preferring to wait for the opportunity for more valuable forms of development. This trend is to some extent being magnified by the general emphasis and priority being placed on new housing provision at the present time.
As a result of occupational searches undertaken on behalf of clients of Colliers International, the following sites have been identified as being currently available to meet larger floor space requirements in West Yorkshire:
Address Area Max single Comment (acres) unit size (sq ft) Gateway 45, Leeds, 165 N/A The site is affected by the proposed route of Junction 45 M1 HS2 and a significant part of the site is recommended for being safeguarded from general development. All enquiries linked to this site are seeking alternative options elsewhere. 62 Leeds, Gelderd Road, J 70 640,000 Outline PP for 1,000,000 sq ft. Site enabling 27 M62 works complete. Newmarket Site, 110 500,000 Outline PP. 2 separate ownerships. Site Wakefield, J30, M62 enabling works due to commence in September 2018. Crosspoint 33, 28 600,000 Outline PP. Infrastructure complete. TK Maxx Ferrybridge, J33 M62 638,000 sq ft completed Q2 2017
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Sherburn2 75 550,000 Outline PP. Infrastructure works commenced. In discussions with 2 major occupiers, both for the majority of the site.
4.2.5 DEMAND
From a functional perspective the Leeds market area also includes most of the M62 between the A1 in the east and the Pennines in the West. When analysing demand, this is the area considered.
Occupier demand has resulted in the take up of industrial premises as follows:
Industrial Take Up - Leeds Market Area (10,000sq ft and above) 2,500,000
2,000,000
1,500,000
1,000,000
500,000
0 2012 2013 2014 2015 2016
In recent years take up of large industrial units (over 100,000 sq. ft.) has accounted for between 20% and 40% of the total take up (by floor area). In 2016, there was only one large building transaction when Legal and General Homes chose Sherburn 550 at Sherburn-in-Elmet to locate their new 550,000 sq. ft. modular building facility. Sherburn also attracted the previous largest industrial deal, when Debenhams acquired 660,000 sq. ft. on the same Park in 2010. Both these deals were concluded because of immediate unit availability of the required scale.
Leeds hasn’t seen the level of take up of larges premises due to a lack of suitable sites. Areas with significantly more general employment land availability have tended to attract this type of occupier, for example TK Maxx’s decision to take 634,000 sq. ft. at Knottingley, Poundland occupying 525,000 sq. ft. at Normanton and most recently Allied Glass taking 190,000 sq. ft. at Eurohub in Wakefield.
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Further afield in the wider Yorkshire region, significant deals that have completed in the last 12 months have included Lidl purchasing a 35 acre site for a 686,000 sq. ft. regional distribution centre at iPort, Doncaster, CEVA taking a 216,000 sq. ft. D&B at iPort, Doncaster, Fellowes taking 143,000 sq. ft. D&B at iPort and Amazon committing to a total of 1.315 million sq. ft., also at iPort, Doncaster. iPort has been the game changer within the regional industrial and logistics market place because it enables virtually unlimited building scale to be delivered, quickly.
More locally, Premier Farnell have committed to a 361,000 sq. ft. design and build facility at Logic Leeds and Amazon are currently under offer for a 362,000 sq. ft. design and build unit also at Logic Leeds. Once up and built, the remaining balance of the Logic site in terms of scale of building deliverability will be significantly reduced to less than 120,000 sq. ft.
The other significant opportunity within the Aire Valley at Gateway 45 is currently sterilised due to the proposed HS2 line dissecting the site, potentially removing a large employment allocated site from utilisation.
4.2.6 RENT AND YIELDS
As a result of the shortage of new and existing industrial stock, rents and prices have increased from around £4.50 per sq. ft. per annum two years ago, to around £6.00 per sq. ft. per annum today. The rents for small-medium sized units small-medium size units have risen further to circa £6.50 per sq. ft. per annum.
Similarly, investors and funders have developed a greater appetite for industrial property investments. The sector is currently the most sought after due to the likelihood demand (and hence rents) will continue to increase because of the changes in the way we shop, the relatively long leases the tenants in this sector tend to commit to and the covenant strength of many of the occupiers. As a result of this investor demand, yields for prime industrial stock have come in from 6.5-7% a few years ago to circa 5% currently.
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5 SUBMISSION DRAFT SITE ALLOCATIONS
We have considered the land allocations set out within the Submissions Draft Site Allocations Plan May 2017 and have a number of observations to make in view of our experience within the marketplace:
5.1 MARGINS BETWEEN SAP AND CORE STRATEGY EMPLOYMENT LAND TOTALS
The SAP and Core Strategy general employment land requirements are effectively the same at 493 hectares. The required margin between the two is delivered only because of the different periods of time over which each plan runs which means that an extra 5 years’ supply is built in. Our view is that this is too narrow a margin given:
a) The massive technological changes taking place currently which are reinventing the way Goods and services are provided. This is leading to changes in market demand and for commercial property. These changes are happening ever more quickly. An example of such change is the move to online retailing which has made a massive difference to demand for distribution and logistics facilities which embody a significant amount of technology and employ more people of higher technical skill than was previously the case. Appendix 3 contains a research report undertaken by Colliers International entitled ‘From Sheds to Shelves’ which details the impact changing consumer trends is having on the property market across Europe and our predictions for the future impact these changes will have. We anticipated technological change will continue and drive new areas of demand for which new premises and facilities will be required and for which land will need to be available. It is not clear to us that the SAP general employment land allocations will provide a sufficient margin to provide the flexibility for Leeds to be able to react to these and other potential future changes in the economy.
b) There are significant planned changes to the transport infrastructure around Leeds which will benefit the economy overall. Such schemes will inevitably absorb an amount of otherwise developable land. Phase 2b of the proposed HS2 route in particular, impacts significantly on some of the submission draft SAP employment land allocations both in terms of a reduction in the amount of land which might be brought forward and the timing of the release of the adjacent land. The latter point is relevant given that Phase 2b of the HS2 route isn’t scheduled to open until 2032/33 and programme overrun on such projects isn’t uncommon. In the interim, development of the adjacent land may be held back, initially by the uncertainty of the route and its timing and secondly as a result of the impact on the overall desirability of the site to potential occupiers.
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Analysis of the current HS2 route plan suggests that significant parts of land at Temple Green and at Hawks Park, Garforth are impacted, not only by the line itself, but also by the requirement for a rolling stock depot to be located in south Leeds. As part of Leeds City Council’s change to the Aire Valley Action Plan, they are seeking to safeguard significant tracts of general employment land so as not to impede the delivery of the HS2 project.
It is not clear the extent to which the impact of these potential changes to future employment land supply have been factored into the SAP general employment land allocations versus the Core Strategy requirements and the effect on both the amount of land to be delivered and its distribution across the City.
5.2 LACK OF FLEXIBILITY AND CHOICE OF SITES
In Appendix 4 we attach Colliers International’s UK Industrial and Logistics Market Barometer for Summer 2017 which provides a snapshot of the marketplace indicating the current low base from which the market is working in terms of low general availability of industrial premises, low speculative completions and low supply of new units.
Against this background, there are clearly opportunities for locations with a range and choice of suitable development sites to attract companies to take new premises and employ local staff as a result.
Our experience is that having different options available to occupiers is important and we feel that the general employment allocations in the submission draft SAP lack the flexibility and choice we would expect for the following reasons:
a) The distribution of such sites is skewed towards the Aire Valley area with approximately 50% of the allocations in that location. However, recent and ongoing transactions at Logic Leeds and the impact of the proposed HS2 line at Gateway 45 have meant that the Aire Valley now has very limited opportunities to offer those companies seeking in excess of 100,000 sq. ft.
b) The nature of distribution by retailers and for e-commerce requires premises closer to the centres of population they can serve, including so called ‘last mile distribution facilities’. Development in and around J47 serves vast market to both the East and North of Leeds.
c) There is a lack of allocated sites capable of accommodating large floorspace requirements across Leeds. Discounting the land around Leeds Bradford Airport which is aimed at potential occupiers connected with the aviation sector, and the Natural Resources and Waste Local Plan sites for which there is a designated purpose outside of the general industrial property market, the only sites which might accommodate general employment requirements over 250,000 sq. ft. (equating to land take of 11.6 ha approx.) are:
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Site Size Comment Coney Park, Harrogate Road 16.5ha Site is occupied by an existing business and it is (EG1-1) not certain the site will come forward. Station Road, Allerton 21.2ha Allocated for mixed use which may reduce the
Bywater (MX1-27) available general employment land below the 11.6ha threshold and there may be compatibility issues also. Hawks Park, Garforth (EG1- 17.07ha 2 adjacent allocations. The site is significantly 36/37) impacted by the proposed HS2 route and it is unlikely the remainder of the site would offer a
single development platform of sufficient size. Residential planning application lodged on part. Land at Nepshaw 29.04ha The site layout plan which accompanied the Lane/Asquith Avenue, application showed the maximum sized unit Gildersome being circa 477,000 sq. ft. but the site may accommodate slightly larger than this.
Logic Leeds 46.6ha Phase 1 let to Amazon (80,000 sq. ft.) and John Lewis (50,000 sq. ft.). Next phase comprises 3 units (totalling 100,000 sq. ft.) forward purchased by Leeds City Council. 361,000 sq. ft. pre-let agreed to Premier Farnell and a further 362,000 sq. ft. pre-let under offer to Amazon, leaving a development site capable of accommodating a single building of c. 120,000 sq. ft. Gateway 45 69.56ha The site impacted by the safeguarding required for the HS2 route and it is unclear what development platforms will be available at the site within the plan period.
The above table leads us to conclude that the site allocations which will enable provision for large industrial units of 250,000 sq. ft. and above are too few in number over the plan period given likely market demand. Furthermore, the allocations do not provide sufficient range and choice of opportunity for occupiers and create a marketplace which lacks competitive tension.
In our opinion, this therefore makes the allocation of the subject site immediately to the south of Peckfield Business Park for general employment use of strategic importance given that, other than its Green Belt status, it is a deliverable site with relatively few other constraints and controlled by a developer with a track record of successfully developing such sites. In particular, there are very few other sites, allocated or identified which are capable of accommodating the development of larger buildings for which there is a proven demand.
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APPENDIX 1:
SUMMER 2017 EDITION OF COLLIERS INTERNATIONAL’S UK INDUSTRIAL MARKET COMMENTARY
UK Industrial Market
SUMMER 2017
TABLE OF CONTENTS
1 Economic Overview 4
2 UK Industrial Market 4
3 UK Industrial Forecasts 11
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1 ECONOMIC OVERVIEW
The industrial sector remains mostly insulated from destabilising political and economic developments, perhaps even benefitting in the short to medium term from the UK’s decision to leave the EU. Indeed, sterling’s rapid devaluation has galvanised UK exporters and increased their competitiveness in the global market. Additionally, although retail spending is under pressure, with online sales also seeing slower growth, uplifts in online sales continue to outstrip store trading growth.
Nonetheless, the occupier market has seen a slight cooling in demand as the wider uncertainty surrounding Brexit and the national election lingers. What is more, the dip in consumer spending since Christmas has certainly not helped and has impacted on large warehouse requirements in particular, with activity here only stimulated by reactions to lease events rather than appetite for growth. The mid-range market is, however, still witnessing strong demand and activity, especially in London and the South East
The lack of supply continues to characterise the market, with some speculative development coming forward but limited in scale and mainly focused on prime locations. Furthermore, there is still a shortage of quality industrial sites coming onto the market. Evidence of capex retention by occupiers, particularly the case for retailers whose sales disappoint, were best exemplified by Debenhams’ announcement of number of depot closures (11), part of its new CEO’s strategy.
The industrial sector is forecast to be the star performer among commercial property sectors in 2017-2021, with the all-industrial MSCI rental index expected to increase by 2.5% this year, slowing to 1.7% in 2018, before resuming an upward trend in the following years, bringing the 5-year annual average to 2.5%. Total returns will also outstrip other sectors, reaching 9.1% this year and averaging 7.9% in the 2017-2021 period.
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2 UK INDUSTRIAL MARKET
2.1 DEMAND
Following a record 34 million sq ft take-up in 2016 for units over 100,000 sq ft, in Q1 2017 demand was 6.5 million sq ft, which is in line with the 5- year Q1 average but 9% below the overall quarterly average in the last 5 years. The overall UK take-up in Q1 2017 was circa 19 million sq ft, 20% below Q4 2016. The lower take-up in Q1 2017 was to be expected as the first quarter of the year is typically one of the less active.
Retailers and wholesalers, usually the most active occupier sector, were not as acquisitive as usual during Q1 2017 and only accounted for 29% of all quarterly activity and 35% for unites over 100,000 sq ft. Notable by its absence was Amazon, with retail and wholesale sector demand driven by discount retailers such as Aldi, Lidl and Sainsbury’s. In the largest deal of the year so far, Aldi signed a lease of 666,299 sq ft at Thomsett Way, Queenborough, while Lidl took 185,000 sq ft of ground floor industrial space from DP World at London Gateway on a five year lease at £1,572,500 pa, equating to £8.50 psf.
Manufacturers have also been active and the sector accounted for 35% of take-up over 100,000 sq ft (27% for all size bands) . The letting by Jaguar Land Rover of the 555,000 sq ft Tyrefort Dunlop warehouse in Minworth was the largest transaction in the manufacturing sector although Molson Coors Brewing also completed a sale and leaseback of their 485,000 sq ft
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warehouse in Burton on Trent and Accrol Paper let the 370,000 sq ft M58 warehouse in Skelmersdale.
Q1 2017 Take-up by Business Type
1.2% 4.5% 0.9%
5.0%
Retailers/Wholesale
Manufacturing
5.8% 29.1% Transportation
Business Services 10.0% Agri/Mining/Utilities
Personal Services Medical 16.3% Engineers/Architect 27.3% Other
Given the occupancy requirements of manufacturers, it was the take-up of secondhand and refurbished schemes which drove activity during Q1. More than half of all space taken-up was secondhand, the highest proportion since Q4 2015.
The largest pre-let agreed during the quarter was Gardman’s pre-let of 414,000 sq ft at Prologis’s Apex Park in Daventry which will complete the third phase of the park.
A key driver of demand in the industrial sector continues to come from e- commerce and the “want it now” consumer culture. This has contributed towards strong take-up levels both at the “big shed” (>100,000 sq ft) end of the market and for smaller suburban last mile delivery units, particularly in London and the larger conurbation
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2.2 SUPPLY
Occupational demand has been outstripping supply for over three years. Whilst developers have responded to the supply shortage with an increasing number of speculative schemes, the response has so far been targeted and measured. The completion of speculative developments has made a difference to the overall availability rate, but it is still falling, and we have seen several of the speculative developments completed this year let during construction or soon after completion.
Overall UK industrial availability continued to decline (-13% yoy) by 17% distribution units, ending the year at the lowest level on our records. Whilst we have seen an increase in the volume of newly-developed speculative space, which in turn has increased the quality of choice on offer to occupiers, the volume of available secondhand space is critically low. We have not seen the return of secondhand stock that could be expected in times of strong pre-letting activity and occupiers are strongly expanding their overall occupancy of warehouses.
Big shed availability continues to fall across the UK and has fallen by 20% in the last 12 months to 26.4 million sq ft across the UK. Even though circa 10 million sq ft schemes were completed in 2016, availability continues to fall as units tend to be let quickly (typically within 6 months from practical completion). The supply is likely to fall again in the next 12 months as only 3.8 million sq ft is set to be delivered across 17 units in the country in 2017 (8.6 million in 2016).
Notable schemes include DB Symmetry’s four sites in Swindon, Blyth, Bicester and Middlewich. A vast majority of schemes being delivered this year are for units below 200,000 sq ft, even though majority of requirements seeking of space above 200,000 and above.
Accoring to Prologis research, for every €1 billion spent online, an additional 775,000 sq ft of warehousing space is required. As of August 2016, online sales constituted 14.3% of UK retrial (source: ONS), and forecast to reach 21.5% by 2020. To meet the projected demand from online retail we forecast that 19 million sq ft of new industrial space will be needed to be built annually in the UK and 1.3 million in Greater London.
Longer term, Savills predicts that at the end of 2016 only 1,600 acres of land remained available and primed for development in the South East where demand for logistics and last mile distribution are the highest. As a
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result, there only remains just over five years’ worth of deliverable stock in the region.
Competition from residential developers and other land users is pushing industrial to the back of the queue. Even though the e-commerce sector continues to boom, with the 2016 festive period showing online sales up by 19% year on year, the next few years may prove more challenging. The lack of accessible land in high population areas already presents challenges to finding suitable facilities for last-mile deliveries.
As retailers and logistics operators are under pressure to meet consumer demand for cost-effective and speedy delivery, local planning authorities need to incorporate logistics into the overall plan where residential and logistics mix, as well as consolidate uses such as, click & collect or flexible facilities that can be use by multiple users. In London, high-density multi- storey residential schemes with ground floor logistics and retail already exist.
2.3 INDUSTRIAL RENTS
The upward pressure on rents has been primarily caused by the imbalance of supply and demand, as well as alternative use redevelopment pressures. Constrained supply in the industrial and logistics sector combined with strong levels of take-up has ensured that rents maintained their upward trajectory over the last 12 months. Occupier demand continues to be driven by the growth of online sales as shown in the recent flurry of activity by online retailers such as Amazon.
Prime headline rents for big sheds (over 100,00 sq. ft.) rose across most regions, led by South West (+6.9%), East of England (+6.6%) and Greater
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London (+5.3%). Dublin, Swindon, Belfast and Basildon experienced the highest rental growths in the last 12 months.
2.3.1 MULTI-LET INDUSTRIAL
Prime Prime industrial rents for small sheds increased by an average of 3.9% year on year with 43 out of 117 of the centres showing an increase. Even though the growth was slower than in the previous years, the average prime rent for small sheds reached £8.57psf in the UK. The highest prime rent was established earlier this year at the Quad, Park Royal, achieving rents ranging from £16.75 to £17.25 psf. Historically, Heathrow was perceived as the more expensive location, but, in fact, Park Royal rents caught up in 2011.
Shortage of prime product is forcing up rents across the majority of UK regions. Greater London (+15.4%), Scotland (+12.1%) and Ireland (22.7%) saw the healthiest average annual growth in the last year. Seven centres saw uplift of over 20% in the last 12 months, including Inverness (33.3%), Park Royal (25%), Staples Corner (25%), Acton (25%), Cork (25%), Stirling (23%) and Reading (22%), all experiencing the highest rental growths. There were no centres that saw a decrease in rental values year on year.
Prime Rents Small Sheds (10,000 - 30,000 sq ft 2016 2017 Change (YoY) Inverness £9.00 £12.00 33.3% Park Royal £13.75 £17.25 25.5% Acton £12.00 £15.00 25.0% Staples Corner £12.00 £15.00 25.0% Stirling £6.50 £8.00 23.1% Reading £9.00 £11.00 22.2% York £5.75 £6.75 17.4% Bellshill £6.50 £7.50 15.4% Glasgow £6.50 £7.50 15.4% Livingston £6.50 £7.50 15.4% Doncaster £5.25 £6.00 14.3% Uxbridge £11.00 £12.50 13.6% Edinburgh £7.50 £8.50 13.3% Exeter £6.75 £7.50 11.1% Source: Colliers International
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Secondary The dwindling supply is not just limited to prime stock and is also creating a very compelling secondhand rental growth story. Secondary rents increased by 2.4% year on year, in comparison to 3.4% during 2015. 34 or 29% centres saw uplift in the last 12 months.
The strongest uplift was experienced in Scotland (+8.6%) and East Midlands (+6.5%). Centres that saw over 20% rental increases year on year include Dublin, Cork, Stirling, Edinburgh, Greenford, Hayes and Sheffield. No centres saw a decline in secondary rental levels with over 71% remaining unchanged over the past 12 months.
UK Average Small Sheds Rents (Prime vs Secondary): 2007-2017
Prime Secondary
£10.00
£8.00
£6.00
sf p £4.00
£2.00 £0.00 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Colliers International
Source: Colliers International 2.3.2 DISTRIBUTION WAREHOUSES
Prime average rents for big sheds increased by 3.3% to the national average of £6.31 psf, showing a return to the pre-recessionary levels. 44% of centres saw prime rents rising year on year, with strongest annual growth seen in the South West (+6.9%) and East of England (+6.6%). The highest rent for distribution warehouses remains at Heathrow, which is now achieving rents of £15.50 psf.
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Centres showing the highest rental growth year on year include Dublin, Swindon, Basildon, Dagenham, Belfast, Doncaster and Peterborough.
Prime Rents Big Sheds (over 100,000 sq ft) 2016 2017 Change (YoY) Dublin € 5.50 € 7.00 27.3% Swindon £5.00 £6.00 20.0% Basildon £7.00 £8.00 14.3% Dagenham £8.00 £9.00 12.5% Belfast £4.50 £5.00 11.1% Doncaster £5.00 £5.50 10.0% Peterborough £5.00 £5.50 10.0% Source: Colliers International
Secondary Shortage of good quality supply coupled with expansionary activity from occupiers meant that secondary rents continued to see upward movement in the last 12 months, albeit at the slower rate than in previous years. While prime rents performed strongly, secondary rents are forcing rental gap between prime and secondary stock to narrow. Average UK secondary rents grew by 3.5% to reach the national average of £4.53 psf.
The East of England (+17.2%) and South West (+12.3%) regions experienced double digit increases. Tightening of supply for all Grades of distribution product in those regions has meant that second-hand accommodation in some core locations are now more attractive. Dublin witnessed a significant rental uplift for its secondary units in the last 12 months from €4.00 to €6.00 psf, while Bristol and Swindon’s rents increased by 20% year on year.
UK Average Big Sheds Rents (Prime vs Secondary): 2007-2017
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Land Values UK average land values per acre, while still below pre-downturn levels, saw healthy uplift in the last 12 months. The UK average figure rose by 4.1% to £549,000 per acre for lots sizes of 10 acres and above. The South East and Eastern regions saw exceptional uplift in the face of limited supply of sites and strong competition from developers.
Land values in West London, including Heathrow, Park Royal and Staples Corner, Acton and Poyle currently achieve the highest £2,500,000 per acre for less than 5 acre lots.
Average UK land values for <5 acre lots increased 3.1% to £863,000 per acre.
3 UK INDUSTRIAL FORECASTS
Despite uncertainties following the EU Referendum, the UK industrial market is forecast better than other major property sector in terms of both rental growth and yield impact. The projected average annual increase in 2016-2020 of 2.2% will be the fastest pace of growth among the main commercial sectors by a comfortable distance.
Positive outlook fuelled by a shortage of quality products and strong demand, with the latter supported by rising online retail sales and an export-friendly exchange rate. The strong occupier market fundamentals will continue to hold the logistics market in good stead.
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APPENDIX 2:
LIST OF AVAILABLE NEW/MODERN INDUSTRIAL PREMISES OVER 100,000 SQ FT (Yorkshire & North Notts)
June 2018
Modern/New Big Shed Availability – Yorkshire & Nottinghamshire
West Yorkshire
GRADE PROPERTY / SITE DEVELOPER / SIZE ASKING RENT / COMMENTS LANDLORD PRICE
A Tri-Link 140 Yorvale/ Kier/ 142,000 sq. ft. £5.75 per sq. ft. SPEC. BUILD Wakefield Europort Maplegrove Constructed 2015 J31 M62 Developments 13m eaves WF10 5QH 13 docks 2 drive in doors 48m yard 2 storey offices 6 acre site.
B+ Gilcar 31 Wickes (Travis 111,600 sq. ft. Assignment 2001 construction. Normanton Perkins) /sublease expiring 10m eaves J31 M62 16th October 2021 at 2 docks WF10 5QS a passing rent of 7 drive in doors £610,357 (£5.47 per 65m yard plus canopy sq. ft.) 2 storey offices Sprinklers
W’hse heating and lighting Gatehouse 9.2 acre site
B Former TK Maxx RDC British Steel 175,000 sq. ft. £4.75 sq. ft. 12m eaves to majority Normanton Pension Fund 16 docks J31 M62 1 drive in door Single storey offices
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June 2018
South Yorkshire
GRADE PROPERTY / SITE DEVELOPER / SIZE ASKING RENT / COMMENTS LANDLORD PRICE IP2e Verdion 195,000 sq. ft. £5.75 per sq. ft. Spec built 2017 construction A IPort 15m eaves Doncaster 18 docks J3 M18 3 drive in doors DN11 0BF 55m yard 8k sq. ft. two storey offices 75 car parking spaces 29 lorry parking spaces 8.42 acre site Nimbus Park Phs 2 Sladen Estates 164,000 sq. ft. £5.75 per sq. ft. SPECULATIVE BUILD DUE TO PC MARCH A 2019 SPEC TBC
IP2g Verdion 119,060 sq. ft. £5.75 per sq. ft. SPECULATIVE BUILD DUE TO PC SEP A IPort 2018. Doncaster 2018 construction J3 M18 12.5m eaves DN11 0BF 9 docks (2 extra hight) 2 drive in doors 55m yard 2,820 sq. ft. single storey offices 65 car parking spaces 19 lorry parking spaces
Nimbus Park Phs 2 Sladen Estates 106,000 £5.75 per sq. ft. SPECULATIVE BUILD DUE TO PC MARCH A 2019. Spec TBC
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June 2018
B Aspect Helical Bar 123,811 sq. ft. £4.75 per sq. ft. 2007 construction West Moor Park 10m eaves DONCASTER 10 docks J4 M18 2 drive in doors DN3 3FF Previously occupied by Next who have taken a new 689,000 sq. ft. warehouse at G Park Doncaster. Bought by Helical Bar from IM Properties in April 2014 for £6,430,260 (£52 psf). Unit available on a new lease from December 2015.
Shepcote Business Threadneedle 96,278 sq. ft. £5.35 per sq. ft. 10m eaves B Park 8 docks Europe Drive 3 drive in doors Sheffield 2 storey offices S9 1XT Warehouse lighting Potential to extend warehouse by 20,000 sq. ft.
C Rotherham 125 Goodman 124,965 sq. ft. £4.00 per sq. ft. Eaves up to 10.6m Rotherham Rd 7 docks MALTBY Under offer to ITM 4 drive in doors J1 M18 Power 7.4 acre site S66 8EL Gatehouse Lighting 810 KVa power £2m refurbishment programme completed Formerly occupied by Wincanton
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June 2018
North Nottinghamshire
SP1 Symmetry Park DB Symmetry 150,000 sq. ft. £5.75 per sq. ft. SPECULATIVE BUILD DUE TO PC AUGUST A Blyth 2018 J34 A1(M) 12.5m eaves height 14 docks 4 drive in doors 50m deep yard High quality ancillary offices 21 trailer spaces 161 car parking spaces Fully fenced and secure site with gatehouse Designed with expansion up to 250,000 sq. ft. Nickel 28 Richardsons 261,000 sq. ft. £5.95 per sq. ft. SPEC. BUILD – PC DUE SEPTEMBER 2018. A South Normanton Capital/ 15m haunch height J28 M1 Thorngrove 24 dock level doors (4 oversized) DE55 2DT 4 level access doors 50m yard First and second floor office / ancillary accommodation 181 car parking spaces (approx.) Fully secure site with gatehouse entrance 47 trailer parking spaces (approx.) On-site HGV stacking capacity Potential for Solar PV roof
Park Road 108,051 sq. ft. £5.00 per sq. ft. 1991 construction C Holmewood (including existing fit High Bay section with 18.4m clear internal J29 M1 out). height S42 5UT Main warehouse with 9.2m clear internal height Fully racked 12 dock level loading doors 2 storey, fully fitted offices Fully fenced site with gatehouse and security barrier Separate lorry parking for 24 trailers Full site circulation
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APPENDIX 3:
‘FROM SHEDS TO SHELVES’ – A REPORT BY COLLIERS INTERNATIONAL (OCTOBER 2015)
EMEA | Retail & INDUSTRIAL Winter 2015
Colliers European Retail & Logistics Insights From Sheds to Shelves
Executive Summary The emergence of retail logistics as a new type of property investment reflects wholesale Table of Contents changes in the way people shop and the way 1. From Sheds to Shelves - 2 retailers do business. 2. Consumer Demand and Macro Trends - 3 Britain leads Europe in its composition of prime 3. Digital Retail - The Last Mile - 4 retail and logistics assets, driven by the highest 4. Global Trade Flow Clusters - 5 demand in Europe for e-commerce with at least 5. Investment Trends - 6 15% of sales now made online. We expect this 6. Market Forecasts: European Warehouse Demand - 7 to rise to at least 20% by 2020, which reflects 7. View From The Top - Tritax Big Box - 8 similar forecasts in many other established 8. View From The Top - Segro - 9 global markets. 9. View From The Top - Prologis - 10 10. Colliers Outlook: 2016 and Beyond - 11 Continental Europe is not far behind, with online sales in Germany at over 11%, followed by the Netherlands, France and Nordic markets. The rapidly evolving CEE markets led by Poland and the Czech Republic are helping to drive European online sales to over 8% of all retail activity, ahead of the US. From Sheds to Shelves
While many investors rightly separate different asset classes and invest accordingly, never have the fates of the retail and logistics sectors been more closely aligned.
In the age of ‘online everything’, we have seen the symbiotic growth of large distribution centres (DCs) fuelled by soaring retail demand. Much of that admittedly has come from online-only companies. But established players on the high street now have bigger stores than ever before and mighty online machines to match. Confusingly though, online players are now starting to emerge in the real world, with Amazon recently opening up a book store in Seattle.
What it highlights is the pace at which the omni-channel and multi- channel revolution has quietly emerged over the last five years. As social media has grown in importance and as mobile shopping has ballooned, companies have had to respond. The solution is to cater to changing demands by making the most out of your assets. Whether that means reconfiguring billboards to have Minority Report-style insight into passers by or simply adjusting inventory levels based on footfall, technology plays a key role in supporting existing retail – and not by shifting it all online.
Coupled with this, the infrastructure that supports both the first mile and last mile of the journey is also crucial. The evolution of deep water ports, super-sized container ships and inter-modal logistics hubs combining road, rail and sea has been fascinating. The arteries that sit beneath the skin of retail are vital for the whole economy and what is clear is that a far greater level of awareness is needed of the role they play and the barriers they face.
In our first European Retail & Logistics Insights report, we have researched some of the emerging trends across these fascinating areas, using case studies and fresh local market analysis to highlight how Europe’s retail and logistics market is evolving.
This report ties into Colliers’ recent global study on how Europe’s network of ports and logistics hubs connects globally with the retail sphere.
It’s fair to say that traditional warehouses have seen a reinvention of sorts into tech-focused DCs. Competition for land around key European urban centres combined with the need to support same-day delivery, could see new facilities emerge, but sprawled across several storeys - just as they are in Hong Kong, Singapore and Japan. These DCs will be orbited by smaller urban logistics bases from which consumer deliveries can be deployed. And there may be scope for such locations to make use of old office stock or assets that could not have been used for housing.
Nevertheless, urban logistics rents will have to compete with other uses. Someone will have to pay - and that someone is likely to be the consumer. Will that mean higher delivery costs for consumers who demand everything today? Perhaps.
What we do know is consumers are fickle. Less than a decade ago, major supermarkets were building massive stores that sold everything from garden furniture to car insurance. Now everyone has decided they prefer the lure of convenience and supermarket land-banks are being cashed in for residential development. This should be a stark reminder that while we will continue to see fundamental structural change across both the retail and logistics sectors, nothing lasts forever in an ever-changing market place.
2 Colliers European Retail & Industrial Insights | Winter 2015 | Retail | Colliers International Consumer Demand and Macro Trends >> While Europe will see its population dip over the next 25 years, it will see its digital urban population – consumers living in urban communities, connected on-line and accustomed to digital consumption – rise by 30% to over 600 million. The most significant growth rates will be in the Nordics (58%), the UK/Ireland (48%), Turkey (48%) and western Europe (39%). The biggest growth in customers will be in western Europe, the UK/Ireland, Turkey and southern Europe. >> Although European growth is significant, it pales into comparison relative to China, India and the North American markets. The digital, urban populations of India, China and North America are likely to grow by 74%, 65% and 44% respectively. China is set to have over 1 billion digital, urban consumers by 2040. India will have over 600 million and North America (US, Canada and Mexico) 500 million. This helps explain why many European retailers are shifting their attention to these other global domiciles, with awareness of the growth potential in India seeing a more recent uplift. As China switches from manufacturing to consumer economy, this trend is likely to accelerate. >> The biggest demographic shift globally will be that of the growth of seniors – those over 64 years old. This will mean that the current supply of youth-focused fashion brands will have to refocus their attentions in order to maintain business. Or perhaps it will create a whole new set of brands to rival H&M and Zara - Forever 61, for instance.
Fig. 1: Population Growth to 2040 by Key Consumption Group: European Sub-regions [Million]
Million Children/Teenagers Young Adults Middle Age Seniors 20 Aged < 20 Aged 20-34 Aged 35-64 Aged >64
15
10
5
0 Russia Turkey Russia Turkey Russia Turkey Russia Turkey Nordics Nordics Nordics Nordics UK/Ireland UK/Ireland UK/Ireland UK/Ireland
-5 Western Europe Western Western Europe Western Western Europe Western Western Europe Western Southern Europe Southern Europe Southern Europe Southern Europe Visgrad 4+Baltics Visgrad Visgrad 4+Baltics Visgrad Visgrad 4+Baltics Visgrad Visgrad 4+Baltics Visgrad South-east Europe South-east Europe South-east Europe South-east Europe
-10
Source: UN, Colliers International
3 Colliers European Retail & Industrial Insights | Winter 2015 | Retail | Colliers International Digital Retail – The Last Mile >> With the volume of mobile traffic generated globally by Fig. 2: Warsaw: Shopping Centre Tenant Analysis smartphones predicted to grow tenfold by 2019 the market will increasingly need to turn its attention to expanding digital 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% infrastructures to capture a large proportion of consumers. >> Ultimately the part of the supply chain that will attract the most DIY attention from consumers will be the last mile. Whilst drone delivery threatens to become part of the modern space race, Children & Maternity retailers are already using existing infrastructure to resolve time and cost issues that have typically plagued the last mile. >> Collection points have grown as a natural solution in congested Hyper/ Supermarket/ Groceries cities with consumer groups typically less willing to wait at home for a delivery. Around 33% of customers in the UK are now choosing in-store collection followed by 13% in the US, Shoes, Leather & Bags though experts at Colliers International expect these numbers will double by 2017. Accessories & Jewellery >> In Warsaw, Poland, over 45% of all shopping centre tenants now have some form of on-line service, to complement their retail ‘bricks-and-mortar’ footprint. Of these retailers, 35% Health & Beauty provide an in-store click-and-collect service. This exemplifies just how quickly the market is moving, especially when considering the number of tenants with any form of on-line Fashion - Men presence was close to zero five years ago. >> Towns and cities are going to a need more intricate network of Fashion - Women urban logistics to cope with online demand. This will create a need to develop retail warehouses in and around the periphery of cities where land values are greater per m² than in far out Electronic Equipment places where large warehouses traditionally locate.
>> Skyscraper sheds could be a rolling theme as land around Fashion - Sport our cities tightens. The world’s tallest warehouses now reach 24 storeys, and accommodate automated systems. Many schemes across Hong Kong, Singapore and Japan are multi- Sport Equipment storey and similar schemes are now being considered for in-fill development in tightly constrained US cities. Services >> In Britain, the typical clearing height of an out-of-town DC is a relatively small 10m, although heights are rising driving by the need for mezzanine floors. We expect this to change over the Home Accessories coming years, particularly given the UK government’s push to regenerate brownfield sites and sell off public land. Fashion - Mixed >> Traffic congestion in Britain and other European cities, coupled with the need to improve air quality and manage urban CO2 emissions is seeing an expansion of cycle logistics companies which are faster, Multimedia and more importantly, greener. As urban warehouse footprints expand, these cycle logistics services are set to increase. Food Speciality
Fig. 3: Cycle Couriers Other
Fashion -Lingerie
Homeware
SC on-line In-store pick-up
Source: Pony Zero Source: Colliers International
4 Colliers European Retail & Industrial Insights | Winter 2015 | Retail | Colliers International Global Trade-flow Clusters >> Hugely increased vessel sizes are reshaping the layout of ports >> This is leading to the deployment of a ‘four corners’ strategy, worldwide. As containerised shipments have grown by 290% which shippers are using to engage both the European and over the last 15 years, vessels are now around 25 times the size North American markets. of their 1970 equivalents in order to cater for the extra cargo. >> Beyond the ports, countries in Europe are increasingly turning >> In a post- Panamax and post-Suez world, the port options available to intermodal freight as road transit reaches capacity. The UK for the shipment of goods are greater than they ever before. While was an early-mover in the creation of integrated distribution the dominant ports of the European and North American markets parks served by road and rail, supported by congested roads and remain at the top of the list when it comes to managing trade flows, government policy. However, the role out of these kinds of parks new deep-water ports, notably those proffering strategic alliances across the rest of Europe is only just beginning, and will be key to with shipping companies, are showing the highest growth rates. sustainable trade flows as road freight becomes more congested. The ports of Athens, Sines (Portugal) and Gdansk in Poland are by far the fastest growing ports in Europe.
Fig. 4: Key Global Trade Flows
North-South Pendulum Connector
Circum Equatorial Route
Main Transit Markets
Transoceanic Pendulum Connector
Source: Colliers International
...countries in Europe are increasingly turning to intermodal freight as road transit reaches capacity.
5 Colliers European Retail & Industrial Insights | Winter 2015 | Retail | Colliers International Investment Trends Fig. 6: European Yields; Trading Averages [2007-2015 Q3] >> In the UK, industrial property is set to outperform all other 10 % forms of commercial property along with bonds and gilts Industrial Retail from 2015-2019. It has been one of the best performing asset classes in the UK and Europe over the last two years.
8% IPF - UK Total Return Forecast: 2015/19
Standard Retail Shopping Industrial Office Retail Warehouse Centre 6%
8.3% 8% 7% 6.8% 6.7%
Source: Colliers International 4% 11 Q1 11 Q3 13 Q1 15 Q1 14 Q1 12 Q1 10 Q1 13 Q3 15 Q3 14 Q3 07 Q1 12 Q3 15 Q2 10 Q3 09 Q1 08 Q1 07 Q3 09 Q3 08 Q3
>> The IPF forecast that UK industrial real estate is expected to Source: RCA, Colliers International generate more than 15% in total returns at the close of 2015, based on a combination of capital growth and income. We Fig. 7: European Investment Volumes: expect core European markets will post lower, but similar high 2007 - 2015 Q3 – Retail vs Industrial returns in response to capital growth. Billion ¤ 35 >> European industrial yields have compressed considerably since Industrial Retail Q1 2013, from an average of 8% to 6.8% as of Q3 2015. Over
the same period of time average European retail yields have 30 remained relatively static at around 6.3%. >> When it come s to prime assets, yields for prime logistics in 25 core European (and global) markets are now below or at 5% such as Singapore, Hong Kong, San Francisco and now in the
UK. In some markets such as Chicago, Seattle, Vancouver, 20 Miami and even Rio de Janeiro and Mexico City, prime industrial yields trade at a premium to prime retail. 15 >> In volume terms, however, European retail remains as popular as ever, comprising twice as much of European deal-flow than that of industrial. This is partially due to the defensive strengths 10 of major shopping centres, which remain very attractive assets. It is also driven by the fact that retail values are usually least four times higher than those of modern logistics. 5 >> Both sets of assets are in short-supply, however. Holding periods for many prime shopping centre assets in Europe now 0 11 Q1 13 Q1 11 Q3 15 Q1 14 Q1 12 Q1 10 Q1 13 Q3 15 Q3 14 Q3 07 Q1 12 Q3 15 Q2 10 Q3 09 Q1 08 Q1 07 Q3 09 Q3 extend well beyond 10 years, which exemplifies their popularity. 08 Q3 There is a different pattern for prime logistics in that they are Source: RCA, Colliers International typically new, but also because many of these new facilities are developed on a built-to-suit basis for specific occupiers, they Fig. 8: Prime Logistic Yields vs 10Yr Government Bonds aren’t built as readily available investment product. 8% 10Yr GB Prime Yields, 10Yr Lease Logistic >> Nevertheless, because occupiers such as Amazon or Tesco, or parcel delivery companies like Hermes, have to compete 7% so heavily for a restricted number of modern buildings, they 6% sign long leases up to 25 years. This compares to average 5% commercial property leases of around 6.8 years. 4% >> Investors therefore see industrial property as a quasi, fixed- income play that offers a far higher return than bonds or 3%
gilts, which remain at record lows. A lack of speculative 2% development has reduced supply further underpinning prices. While rent rises have not been as positive as in city office 1% markets, for example, they are traditionally far more stable 0% Germany Sweden France Czech Italy Spain UK US and fluid which is preferable for institutional investors such as Republic
pension funds, who value steady income. Source: RCA, Colliers International
6 Colliers European Retail & Industrial Insights | Winter 2015 | Retail | Colliers International Market Forecasts: European Warehouse Demand >> Most importantly this report sets out the key trends that will >> In the chart the blue bar represents what the annual warehouse/ shape retailers and logistics specialist’s property portfolios, to distribution space requirement could be based on existing create sustainable supply chains that will withstand changing e-retailing sales levels. The second bar represents what the populations and consumer behaviors. Ultimately retailers annual warehouse/distribution space requirement could be will need to follow the global trend of growing digital urban based on e-retailing sales reaching 20% of all retail sales. populations but as competition for business gets more fierce they >> Overall, our current estimates would increase 2016 demand will have to come up with time and space saving efficiencies. levels across Europe by around 10-15%. As the market moves >> We have forecast the potential growth in logistics demand in towards this higher e-retailing sales operating model, it Europe to 2020, based on the combination of forecast population illustrates the extent to which e-retailing will continue to drive growth, household consumption levels and historic spending much higher demand requirements on an already supply- patterns on fast and slow moving consumer goods, by country. constrained sector. These forecasts have been aggregated to European sub-regions. >> We’re not suggesting this requirement will create an immediate >> In order to derive the potential quantum of space required equivalent need, as some existing facilities will be able to to handle the growth in spending on consumer goods, we service and increase in requirements through improved have analysed a number of European retailers to determine utlisation of existing capacity. Indeed, the more sophisticated how much warehouse space they use in relation to their DC’s become, one expects the warehousing requirement gross annual turnover. This allows us to estimate warehouse to stabilize as more efficient stores, supply chains and demand, using a number of scenarios which forecast the warehousing are enabled to manage a higher throughput and annual requirement per sub-region based on e-retailing rates. flow of goods per m2. >> But until such time as the market comprises these superior, Fig. 9: E-Retailing Warehouse Space technologically driven-DCs and their supporting infrastructure, Requirement: Annual to 2020 the growth in demand for more warehousing will put increased
Million m² pressure on the market. In turn, this will continue to drive 1.6 investor interest to the sector. UK/ Ireland
1.4
1.2
1.0
Western Europe
Logistic Space in m², based on current e-retail 0.8 Turkey Logistic Space in m², based on 20% e-retail
0.6
South-east Europe
0.4
Visegrad 4+Baltics Southern Europe Nordics
0.2
Russia
0 Source: World Bank, Colliers International, OECD, Various
*The warehouse space requirement figures provided in Fig 9 are based on a combination of forecast population growth, consumer spending levels and trends for each European country. These forecasts have been converted to warehouse space requirements using a proprietary Colliers model based on retailer revenues relative to their warehousing/distribution platforms.
7 Colliers European Retail & Industrial Insights | Winter 2015 | Retail | Colliers International Views From the Top - Tritax Big Box
How far off are we from fully automated sheds or double or even triple-decker big boxes? >> In some cases the internal fit-out of the most sophisticated units can exceed the build cost of the shell development and investment Bjorn Hobart, value. Other than some cold stores, most of these buildings are Deputy Fund Manager at Tritax Big Box rentalised on a ground floor only basis but as rents rise and rent What have been the factors in the revival of industrial rolls on big boxes increase, occupiers will look to further increase property since the last downturn? efficiencies. This may be achieved through multi-storey design, especially as the technology becomes more established. The >> During the recession the previous over-supply of quality logistics concept of true multi-decked warehouses, as distinct from multiple buildings was largely taken up. Yields were high and the sector mezzanines, has however, yet to be proven as a format which appeared under-valued against other asset classes. At the same tenants will use. The viability of such buildings is most likely in time, the evolution of internet retailing triggered a structural high value land locations. change in shopping habits, shifting retailers’ focus from traditional outlets to logistics facilities. How are the new shipping routes and super-sized >> The economies of scale and relatively low overheads of logistics container ships changing the landscape for property? space - versus the physical retail footprint – has beem attractive >> Port-centric facilities have grown in importance and are a major to major retailers. The limited availability of such space has led to consideration for some occupiers. Locating logistics facilities on or upward pressure on rents while a compelling story to invest has near container ports reduces drive time journeys. Improved speed and fuelled yield compression. reliability of goods into the warehouse ensure that occupiers can more >> Big boxes have various barriers to entry and are contentious with confidently plan and deliver goods to smaller satellite warehousing, to planning for many obvious reasons. But while they create high stores or to the doorstep of the e-commerce consumer. Together with traffic flows of HGVs people are starting to realise they are crucial increased mechanisation, this has brought down delivery times from for the way society now functions. e-commerce point of sale to the doorstep. The container ports are often rail freight connected to allow national distribution without the need for >> The average box size for the largest retailers has increased. Bigger HGV, thereby reducing costs and emissions. We believe that these too floorplates and higher eaves along with multiple mezzanine floors will become increasingly important distribution nodes. help maximize space. However, it means units are expensive to build and the floor slabs are highly sophisticated.
From an investment perspective, big boxes are seen as Fig. 10: Tritax Big Box - Marks & Spencer Facility a quasi-fixed income play. Do you think the market will continue to act in this way? >> The weighted average lease term of our portfolio now stands at 16.8 years. We have created a long, robust and sustainable income stream which is intended to provide a growing return for investors. Due to the high levels of Capex that the tenants invest into these big box units they commit to long leases to provide them security of tenure for their supply chain. Given the barriers and competing land uses we’re faced with, this trend will continue.
How are big boxes evolving to respond to e-commerce in terms of their technological and space requirements? >> Due to the distinct lack of availability of ready to occupy big Source: Tritax Big Box boxes in the UK (currently only one over 500,000 sq ft), the majority of units taken by occupiers are subsequently Built-to-Suit (BTS). There is a two-fold reason for this. Firstly, there were no units available in the higher size band from the last speculative funding cycle. Secondly, new speculative funding is limited due to the prohibitive capital commitments and potential void costs. Consequently, BTS accounted for 50% of take up in the first half of 2015. Also, the average logistics deal during 2015 has increased to 265,000 sq ft with 56% of deals closed above 200,000 sq ft.
8 Colliers European Retail & Industrial Insights | Winter 2015 | Retail | Colliers International Views From the Top - Segro With such a high focus on housing and the loss of industrial land, what success will you have in creating urban logistics hubs? >> London, for example, is in the midst of a housing crisis. Andrew Gulliford, Delivering new land for housing and making the best use of Chief Operating Officer at SEGRO scarce land in the capital is a key priority. However, a measured and balanced approach must be undertaken that considers the Industrial property continues to outperform needs of London’s industrial and urban logistics sector and commercial property, bonds and gilts. What are the role that it plays in supporting London’s population and investors’ views and to what degree is this simply its continuing economic success. And yet London’s supply of part of the cycle as opposed to a structural industrial land is diminishing at a faster rate than projected. change in the role of logistics? >> So what’s the answer? Two things really, education and >> With industrial property offering better income returns that any innovation. We must continue to educate planning and other use type logistics stock remains an attractive offering for transport policy makers on the important role that industrial equity funds. The e-commerce boom has motivated retailers’ development plays in the national and local economy. We to reappraise their estates, and with rising rents there has must also innovate and find new ways to balance the need for been a growing incentive for companies like ours to increase homes and jobs. For example, SEGRO is about to announce its development. The investor view of logistics has changed residential development partner for a mixed use scheme at the fundamentally for a variety of reasons. Where investors are Nestle site in Hayes, Hillingdon. We have developed a master buoyed by steady, long-term income, the sector is now seen to plan that will demonstrate that through good quality design the be able to deliver this through long leases, high quality tenants two can not only co-exist, but flourish. By taking an integrated and institutional grade assets. approach all users, residents and employees on the site will benefit from the amenities, high quality landscaping and access What’s the situation we’re seeing across Europe? to the canal frontage. This is how our industry has to adapt to >> The retail and logistics property market is effectively playing the changing demographic face of London, but the approach catch-up after the global recession which saw very little new could be delivered anywhere in the UK. development. Even in the most active markets - such as France, Germany and Poland – we are seeing vacancy rates drop to Do you think we need broader policies to define unprecedented low levels of around 5%-10%. Retailers are industrial and job creation space that also support moving quickly to secure space as online sales grow across the need for additional transport investment? the continent. E-commerce is taking a bigger share of total >> What is needed is a better understanding of the role of sales which is having a pronounced effect on the demand for employment space. Urban logistics occupiers do not just create space. Companies like Amazon are taking up vast quantities, jobs. They are meeting the needs of a growing population that followed closely by parcel delivery firms who see a competitive are increasingly using technology to buy products and services. advantage in getting in early, before the supply crunch worsens. The E-commerce sector is booming, which is driving the need to identify suitable sites to service this growing demand. To what degree is new demand for urban logistics creating an evolution in industrial property? >> Whilst it is important that planning policy support the growth of this sector, so must transport policy. London’s congestion >> The UK retail and logistics market is now facing a new type of is well-known, but policy makers should not adopt a knee jerk demand. The growth of e-commerce has meant that retailers reaction by banning the ‘white-van man’ from the capital as has are looking at both bigger fulfilment centres to store and sort been commented on before. These businesses are playing a stock and smaller distribution centres to offer fast, short range vital part of the supply chain, which is helping to keep London’s delivery. Retailers are looking for ways to shorten the supply economy ticking over. chain as customers are increasingly expecting the option of home delivery or in-store collection. >> Over the longer-term retailers and third party logistics operators’ desire for smaller hubs nearer customers and the >> With pressures on delivery timescales the design of urban pressure this will create on roads may make multi-customer logistics schemes is around shifting as much stock as quickly and even multi-storey warehouses a reality. Legislative as possible. The result will be warehouses in multiple locations pressure to relieve congestion may lead to delivery “windows” with as much circulation space and loading points as possible from consolidation hubs where businesses with common to accelerate the flow of stock in and out of these hubs. The customers can come under an umbrella provider. This is technology and design of bigger distribution centres will be already happening at Heathrow airport, some larger shopping of growing importance. We’re already seeing higher buildings centres and Regent Street in Central London. accommodating a number of mezzanine platforms with automation increasingly being used. The sector has proven it >> We, and the majority of our customers, support the expansion at can adapt quickly and it will need to be able to do continuously Heathrow airport and moves made by the current government over the next few years. to find answers to the challenges we face around rail and road capacity are encouraging.
8 Colliers European Retail & Industrial Insights | Winter 2015 | Retail | Colliers International Views From the Top - Prologis
What role will regional hubs across Europe play in supplying the rest of the continent in the same way regional distribution centres supply the country Ben Bannatyne, on a much smaller scale in the UK? Managing Director & Regional Head of Centra & >> Improvements in infrastructure have been vital to making Central Eastern Europe and Eastern Europe viable regions for development. Large brands such as LEGO and BMW are now moving to large fulfillment Given the UK’s strong performance, what is the facilities in central Europe. European market outlook looking like? >> A large volume of global shipments will continue to come through >> Each market is moving at its own pace and the maturity across ports in northwestern Europe such as Rotterdam, Hamburg and Europe is varied. Despite retailers like Amazon establishing a Antwerp, but with the establishment of new deep-water ports, number of large fulfillment centres in Central and Eastern Europe such as the newly renovated Gdansk port, the costs involved with (CEE) there has still not been a full roll out of services to these shipping and distributing goods from Asia have been slashed. On markets; they are there to mostly serve western countries right top of this, new motorway networks are cutting transportation now. Historically, the lack of demand from less mature markets has timescales and making regional distribution hubs connecting up the meant it is not commercially beneficial to establish services in these continent a very real possibility. regions. But things are changing, not least off the back of improving technology and cheap land. >> However this growth could be stilted by poor, fragmented rail connections. If Europe is to commit to a tri-modal system that can >> Demand now exists and we are seeing a number of smaller serve the entire continent then rail authorities will need to join up local players such as Internetmo and Sportisimo gathering pace to create a unified infrastructure plan. One of the biggest untapped with smaller automated sheds. Trends suggest that e-commerce opportunities I see lies around continental waterways to bring is on the rise globally and I think we can expect to see some goods further in-land. consolidation when the bigger operators move in and offer their services to larger regions. After significant yield compression over the past 2 years industrial property is still out performing How does your strategy differ between countries? other use classes, do you see this trend continuing >> We take a full life-cycle approach to assets and tenants, working over the next 5 years? with them from the outset to identify opportunities and to create >> Due to limited new supply in recent years, most demand has the right assets which we manage and invest in ourselves. This been absorbed by existing stock. This has resulted in market is why we have such high customer retention, which in turn is a vacancy rates which are at an all-time low of around 6.2% positive thing for our investors. We are able to accurately track across Europe. As we move into 2016, the combination of low which locations are performing best, and while there are many vacancy levels and limited speculative development is likely to opportunities in Britain, our UK strategy is going to be largely become a more significant driver of rental growth. restricted by land constraints. >> In CEE, cap rate compression has meant that logistics properties >> On the continent – especially in CEE - it’s a different story: have seen little to no increase in rents as landlords have had to Poland, Czech Republic and Slovakia are all really strong with ample take more flexible approaches to rental values. However as cap opportunities for development in the best performing markets. rates stabilise we are very likely to see steady rent growth. How will you divide up the emerging split between large distribution centres and smaller urban Fig. 11: Prologis Park Budapest Harbour logistics facilities? >> While the UK market is focused on single tenant distribution centres the CEE market has substantial demand for large multi-user distribution centres. Broadly, we will be focusing equally on both. >> We’ve seen a sharp rise in demand for regional hubs from last mile logistics firms such as DHL and FedEx who are prioritising urban locations for faster deliveries in to the cities. We’re now looking at around 40% of warehouse space being taken by last mile companies and this will surely rise as other European markets see their own e-commerce markets grow.
Source: Prologis
8 Colliers European Retail & Industrial Insights | Winter 2015 | Retail | Colliers International Colliers Outlook: Top 6 Trends for 2016 and Beyond While few people could have predicted some of the things we have seen over the last decade, we believe the next five years will see technology continue to have a seismic effect on the consumer trends and on the efficiencies of moving inventory around. Our six top trends for European retail and logistics in 2016 and beyond, are highlighted below:
1) High street face-lifts: In the UK, while the very worst hit high streets will die off, many regional and sub-regional centres will be revamped with cafes and leisure outlets, parcel collection points 2) Super-sized warehouses: Soaring land costs and shared work-spaces filling vacant shops. mean developers will find more floor space on a High street across Europe weren’t hit as badly as site by building upwards. Companies like Next, those in Britain during the recession, largely be- River Island and John Lewis already rent millions cause of Europe’s differing shopping habits and of square foot of storage space. Being able to more manageable supply of space. Just as major store closer to people’s homes could streamline retailers are now content to be in just 50 locations deliveries further and allow retailers to better use rather than 200, new chains are filling vacant their supply chains and retail outlets as pick-up spots. They include brands like Doddle, where you locations. In Japan, ProLogis Parc Narita III is a can send and collect parcels. In the UK there is 661,000 sq ft (61,400 sq m) giant industrial facil- Byron, a high-end burger chain promising to open ity spread over seven floors. Europe could soon 10 restaurants every year as it expands nationally. get its own skyscraper sheds. 3) Deep water ports: Container ves- 4) Digital urbanites unite and take over: sels hold more than 25 times as much Research shows that urban-based, dig- cargo compared with 1970 and ports itally-literate consumers will dominate have had to evolve to make room. countries’ populations over the next two Global logistics and shipping indus- decades having a profound impact on tries have evolved to capture and facil- how retail is shaped and delivered. While itate growth in trade. This is why deep Europe itself will see comparatively mod- water ports are now a necessity. Their est growth, a surge across China and emergence across Europe has seen India will create huge opportunities for trade through the Mediterranean soar existing retailers who have the benefit as new shipping routes have grown. of established infrastructure and brands The continent remains far more frag- which often attract emerging market mented than Asia. consumers. 5) Drones could stay grounded: Despite the buzz around drone deliv- 6) Show rooming pays: “Show eries current airspace regulations could keep drones grounded. Instead, rooming” is jargon for when retailers could make better use of existing last mile delivery methods shoppers look but don’t buy, or such as pedal bikes and Uber taxis. The practicality of flying DVD box snap up a product online instead. sets to people in high rise buildings doesn’t stack up – unless office This has been one of the driv- blocks place post collection shoots on their roofs. And then there’s the ers of companies reducing retail cost. While paid services like Amazon Prime offer free delivery, they space and shifting capacity to often only do so for costlier products. Although time-conscious con- more cheaply priced warehous- sumers want everything today, some may begin to wait a little longer for es which can deliver straight less urgent items if they realise just how much they can save. Plus, with to people’s homes. However, increasing concerns over the environment, bicycle couriers or electric smarter retailers will use tech- cars could well become a totem for sustainably-minded retailers. nology – such as augmented re- ality, 3D printing and biometrics – to turn more of a profit from the theatre of real world retail. Offering unique experiences, bespoke products and additional offers can help build balance sheets and brand value.
9 Colliers European Retail & Industrial Insights | Winter 2015 | Retail | Colliers International 502 offices in AutHor: Damian Harrington countries on Director | Head of EMEA Research 67 +358 9 856 77 600 6 continents [email protected] United States: 140 Research Contacts: Canada: 31 Juliane Priesemeister Information Designer | EMEA Research Latin America: 24 +420 226 537 655 Asia Pacific:199 [email protected] EMEA: 108 Zuzanna Baranowska Research Analyst | EMEA Research +44 207 487 1628 [email protected]
¤1.75 Bruno Berretta billion in Senior Research Analyst | EMEA Research annual revenue +44 207 344 6938 [email protected]
160 Business Contacts: mln sq m Paul Souber under management Head of EMEA Retail Business Team +44 20 7344 6870 [email protected]
16,300 Tim Davies professionals Head of EMEA Industrial and Logistics Business Team and staff +44 117 917 2048 [email protected]
James Watson Head of Retail Investment | UK +44 20 7344 6877 [email protected]
Greg Styles Head of Retail Development | UK +44 113 200 1818 [email protected]
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Copyright © 2015 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.
APPENDIX 4:
COLILERS INTERNATIONAL’S UK INDUSTRIAL MARKET BAROMETER – SUMMER 2016
CHANGE IN INDUSTRIAL AVAILABILITY SPECULATIVE COMPLETIONS (SQ FT) UK INDUSTRIAL & LOGISTICS (2009 - 2017) (2007-2017) MARKET BAROMETER UK WHOLE -60% DECLINE IN SPECULATIVE DEVELOPMENTS (YOY) -20% BELOW 10-YEAR AVERAGE SUMMER 2017 15.6m SCOTLAND 14.6m 10-Year Average -44%
H1 2017 TAKE-UP 15% BELOW H1 2016 -62% 8.3m NORTH EAST AMID THE SLOWDOWN IN CONSUMER
SPENDING AND THE UNCERTAINTY 4.9m -37% 4.1m 3.3m GENERATED BY THE SNAP ELECTION 3.5m 2.1m 1.6m
NORTH WEST 1.0m 0.7m WITH AMAZON LESS ACTIVE IN H1 2017, THE YORKSHIRE /HUMBER RETAIL & WHOLESALE SECTOR TAKE-UP WAS -57% DRIVEN BY GROCERY STORES 2017 2011 2013 2010 2012 2014 2015 2016 2007 2009 2008 EXPECTED -70% 27% DEMAND FROM THE MANUFACTURING WEST MIDLANDS EAST MIDLANDS SECTOR AS FAVOURABLE EXCHANGE RATE H1 INDUSTRIAL INVESTMENT VOLUMES CONTINUES TO SUPPORT EXTERNAL DEMAND EASTERN WALES (2007 - JUNE 2017) FOR BRITISH GOODS -72% -69%
-57% -71% LONDON H1 H2 H1 10-Year Average 5,000
DEMAND BY TENANT TYPE SOUTH EAST -63% SOUTH WEST 4,000 H1 2017 2016 -60% -61% £M 3,000 Retailers/ 33% Wholesalers 38% YEARS OF SUPPLY 2009 VS. 2017 2,000 27% 17M SQ FT Manufacturing CURRENTLY UNDER 19% CONSTRUCTION, INCLUDING 28% SPECULATIVE 2009 2017 1,000 SCHEMES 4.9 21% 4.5 4.6 4.4 Services 4.4 3.9 0 19% 3.6 3.1 3.1 2.8 2011 2013 2015
2.8 2016 2014 2012 2010 2007 2009 15% 2.2 2.5 2008 Transportation & 2.0 2.1 1.9 H1 2017 Public Utilities 17% 1.2 1.4 1.3 0.8 0.8 0.8 1.0 1.1 2% Construction 2%
FOR MORE INFORMATION WALES
5% LONDON GREATER GREATER Other EASTERN Head of Industrial & Logistics Research & Forecasting UK WHOLE 2% SCOTLAND Len Rosso Bo Glowacz NORTH EAST NORTH SOUTH EAST NORTH WEST NORTH SOUTH WEST +44 20 7487 1765 +44 20 7487 6902 YORKS/HUMBER EAST MIDLANDS EAST
WEST MIDLANDS WEST [email protected] [email protected]
Sources: Colliers International, CoStar, PMA, Property Data Find out more at colliers.com/uk/industrial
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