Are we heading for an oversupply of speculative logistics again?
That is the question on some sheds specialists’ lips as the market reacts to a stellar 2014 by ramping up development to cater for apparently inexhaustible demand.
Development is on the rise, debt levels are increasing, buccaneering trader developers are back on the scene, fund managers can’t get enough industrial and land values are rising rapidly once again.
We have been here before, of course, in the build up to 2009, when UK logistics availability reached almost 50m sq ft, including almost 30m sq ft of new-build space.
Now, according to CBRE, availability at the end of 2014 plummeted to just over 10m sq ft, suggesting the need for stock could start the same cycle all over again.
What’s more, prelettings comprised 81% of all take-up on new-build space, a sure sign of the low availability of existing buildings and the increased prospects for rental growth.
The knock-on effect in the investment market was profound, with £2.9bn of logistics property sold in 2014 - up from £1.8bn in 2013, with UK institutions and property companies accounting for 82% of the activity. We also saw overseas investors, notably Blackstone, heavily involved.
But while the investment market is heating up, we should always remember that not only is the customer always right, they’re essential to create an income stream too.
A collapse in demand in 2008, mixed with sky-high supply from the 2007 boom, has left scars. While we are not heading for oversupply, it is my view that the pace of response should be dictated by economic and occupational improvement, not the ready availability of money looking to be placed in the sector.
Some investors have already moved up the secondary stabilised asset risk curve and are eyeing development funding as a means of access.
The Midlands, which dominated take-up in 2014, accounting for 55% of the UK total, has seen the largest pick up in speculative development, with a number of big-box schemes in the ‘golden triangle’. To date, supply has been matched by demand with lettings in Birmingham, Coventry and Northampton happening on, or even before, practical completion. We’ve seen very active interest in our speculative phase at Rugby.
We are also reassured that demand is strong in London and the South East, with London’s outer boroughs performing well. Here, speculative development has increased too, but not on the same scale because supply of land is so tight, which is what makes the London and South East markets so robust.
In the past 30 years, the London supply of industrial land has reduced by around 45%, as land at places such as Nine Elms, Stratford and White City has been allocated to housing and retail use.
Traditional areas such as Slough, Heathrow and Park Royal have been successful and we’ve upped our speculative programme in response to a perfect storm of chronic supply shortage outpaced by demand. It’s hard to see any change to this position any time soon and new schemes are driving rents forward - 10%-15% at our flagship West London development, Origin.
So there is the opportunity to take advantage of favourable trends in our markets, but let’s not get carried away. Economic growth is here but it’s still early days. Logistics and industrial market participants should never forget how badly burned the sector was in 2008 and 2009. Build speculatively in the right places and prospects look good. Build recklessly and the sheds sector could catch a cold again.
Andy Gulliford is chief operating officer at SEGRO