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Strong demand buoys warehouse market

says Gerald Eve report. The logistics property market has continued to strengthen over the past year, despite the credit crunch and the spectre of empty rates and economic uncertainty. But, as Gerald Eve's second Prime Logistics report reveals, record levels of speculative development have added to a substantial volume of secondhand space, leading to oversupply in some areas.

An underlying feature of the logistics market last year was that there was no slowdown in occupier demand. In fact, take-up in 2007 was greater than in 2006, albeit with a number of very large deals contributing to this increase. Eight units of over 750,000 sq ft were taken up last year in the 24 key distribution property markets covered by Gerald Eve – more than in any of the preceding five years.

Total take-up last year of all units over 50,000 sq ft grew to just under 38m sq ft with almost 14m sq ft of this accounted for by the most popular size band of 50,000-150,000 sq ft. 2008 has continued this trend with over 10m sq ft of space taken up in the first quarter. South Yorkshire – the no 1 location in Gerald Eve's first Prime Logistics report in 2006 – is still high on occupiers' shopping lists, while Avon & Somerset is living up to the 'excellent' prospects rating it was given last time.

Retailers continue to drive demand – particularly for large warehouses – and their distribution operations now occupy 19% of all logistics space. This sector accounted for almost a third of all demand last year and 61% of floorspace taken up in units of 250,000 sq ft-plus over the last two years.
Developers expressed their confidence in the market last year with more space built speculatively in 2007 than in any other year in the last decade. Speculative development last year accounted for 17.6m sq ft or 62% of total development completions.

Most new spec units were in the 50,000 to 150,000 sq ft band but seven units were of 400,000 sq ft-plus. The north of England experienced the highest proportion of speculative space, at 69%, while the South West and Wales had the lowest, at just 15%.

With so much new space entering the market and competing with the already substantial volume of secondhand units, some areas are showing signs of oversupply. Availability across the country stands at around 14% but is substantially higher in areas like Merseyside & Cheshire, Greater Manchester, South Yorkshire and London East.

The highest availability rate, at the end of quarter one 2008, was in Merseyside & Cheshire, at 9.6m sq ft or 25%, of which almost half is new and refurbished space. At the other end of the scale, Surrey & Hampshire and Suffolk & Essex have the lowest availability rates, with 2% and 3% of space respectively available for immediate occupation.

Following the significant volume of speculative supply that has recently come to the market, the level of speculative development starts has now started to drop off. Work began on only 14 new speculative schemes in quarter one 2008 compared with 26 in quarter four 2007, not surprisingly given the abolition of empty rates relief and the drying up of available speculative finance.

The impact of the empty rates changes is likely to be widely felt, not only in the slowing of speculative supply but also in the cost of vacant stock. Gerald Eve says about two-thirds of speculative schemes built in quarters one and two last year are still available today.

Chris Kershaw, head of industrial agency at Gerald Eve, comments: “The removal of empty rates relief on factories and warehouses is adding more pressure on operators, landlords and developers. The double whammy of excess supply and penalties incurred by empty properties may impact on values and reduce speculative development, especially in markets of high availability.”

Gerald Eve expects modest prime rental growth over the next three years at an average annual rate of 0.9%, with the greatest increases expected in locations in London and the East and West Midlands.

The industrial investment market has been hit by the effects of the credit crunch and major fund redemptions, with yields in all parts of the country having risen by about 100 basis points since the middle of 2007. Quarter one 2008 has seen less than half the number of warehouse investment deals of quarter one 2007, and prime distribution warehouse values are typically around 20% less than a year ago.

Sally Bruer, head of industrial research at Gerald Eve, says: “Looking ahead, the risk of a global economic downturn and concern about UK consumer spending levels threaten to dampen occupier demand. However, early signs are that occupiers are still looking for warehouses and are continuing to take space across the country.”

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