The UK Big Box Industrial and Logistics Market · PDF fileWelcome to our latest update on the...

The UK Big Box Industrial and Logistics MarketJanuary 2016

Introduction and overviewWelcome to our latest update on the UK ‘big box’ industrial and logistics market.This report provides a comprehensive round-up of market demand and supply, based on our tracking of Grade A quality distribution units of 100,000 sq ft and over. Please note our take-up figures include build to suit (BTS) units only where planning permission has been secured. The report also comments on investment activity and yields.

The key take-aways from our report are:

• Occupier demand in the second half of 2015 was marginally up on the first half of the year; however, overall take-up in 2015 was down on 2014, but remained 8% above the five-year annual average (2011-2015).

• Grade A availability rose over the course of 2015 following a pick-up in speculative development.

• Retailers were the most active source of demand in 2015.

• Further rental growth is expected this year.

• The investment market remains strong with downward pressure on yields.

UK Industrial & Logistics | January 216 | 3

The UK economy grew by 2.2% last year, compared with 2.9% in 2014 with the slowdown being largely attributable to a moderation in construction, public spending and weaker net trade.

2016 started inauspiciously with global stock markets falling on the back of worries about a slowdown in China coupled with geopolitical tensions in the Middle East. At the same time, oil prices have continued to fall – briefly dropping below $30 a barrel in early January due to oversupply.

Against this background, expectations for UK growth this year have moderated, with the latest average of independent forecasts compiled by HM Treasury (January 2016) indicating GDP growth this year of 2.2%. Manufacturing looks set to have a difficult year with expected growth of only around 1%.

The fortunes of the retail sector remain mixed with some retailers, such as Tesco, reporting better figures over the Christmas trading period than others, such as Marks & Spencer, Next and Primark. Although overall sales continue to grow, the driver remains online sales rather than the high street – and this continues to be reflected in distribution property demand.

Concerns over China’s growth, a weaker UK outlook and falling oil prices have all contributed to a low inflation outlook for the UK economy and hence have reduced the likelihood of interest rates rising in the immediate term. In January, the Bank of England’s Monetary Policy Committee voted 8 to 1 to keep interest rates at their historic low level of 0.5%.

The EU referendum, expected later this year, is a cause of uncertainty and risk and may act as a drag on sentiment and growth. However, with the UK economy expected to grow this year at a broadly similar rate to last year, we expect UK big box demand in 2016 to be comparable to what we saw in 2015, but not to hit the level posted in 2014, the highest rate of take-up-up since 2010.

2014

GDP

2.9%2015

GDP

2.2%2016

GDPFORECAST

2.2%

Economic context

4 | UK Industrial & Logistics | January 2016

Take-up (Grade A units ≥ 100,000 sq ft)

0

5

10

15

20

25

30

20152014201320122011201020092008

Millio

ns sq

ft

New Secondhand Source: JLL

Occupier take-up of Grade A industrial and logistics floorspace totalled 8.6 million sq ft in the second half of 2015, marginally up on H1 2015 (+1%) but 35% lower than H2 2014. In total, 17.2 million sq ft was taken up in 2015, 12% down on 2014 (19.5 million sq ft) which had been the highest annual level since 2010. Despite a slowdown in satisfied demand in 2015 compared with 2014, the level of take-up recorded last year was still 8% up on the annual average level over the past five years, 2011-2015 (15.8 million sq ft).

Looking at the composition of take-up, some 12.9 million sq ft of new space was taken up last year, 1% up on 2014 (12.8 million sq ft) but 7% down on 2013 (13.9 million sq ft). However, the take-up of good quality secondhand space was 36% lower last year compared with 2014 at 4.3 million sq ft compared with 6.7 million sq ft. This reduction is partly attributable to the diminishing availability of space in Grade A

secondhand buildings and a slowdown in demand in the second half of the year, which over the last few years has tended to be much stronger than the first half of the year.

The majority of new floorspace taken up in 2015 comprised new Built to Suit (BTS) space, rather than speculatively developed space. Around 72% of all new floorspace taken up in 2015 was BTS, totalling 9.3 million sq ft.

Take-up of new Floorspace – Speculative vs Built to Suit

0

2

4

6

8

10

12

20152014201320122011201020092008

Millio

ns sq

ft

Speculative floorspace sq ft Built to Suit floorspace sq ft

1.2m

4.0m

Source: JLL

Regionally, the East Midlands accounted for the largest share of take-up in 2015, at 29% of the total Grade A floorspace transacted. The Greater South East (South East, East and London) accounted for a 21% share of total demand. The North West accounted for an 18% share. Yorkshire & Humberside accounted for 13% of total demand.

Occupier take-up and demand

17.2million SQ FTGRADE A SPACE

GRADE A TAKE-UP IN 20158% up on past 5-year average

12.9million SQ FTOF NEW SPACE

INCLUDING 46%

RETAILERS

30%

LOGISTICS COMPANIES

15%

MANUFACTURERS

9%

OTHER


This is partly explained by outsourcing by retailers, including for online fulfilment. Last year a number of contracts were awarded: for example, Clipper Logistics took 342,000 sq ft at Grange Park Northampton for a contract with Zara; XPO Logistics took 250,000 sq ft at Central Park, Trafford Park in Manchester for a contract with Missguided; DHL took 235,000 sq ft at Rugby Gateway for a contract for TK Maxx; and Ceva Logistics took 150,000 sq ft at Prologis Eurohub, Corby for a contract with IKEA.

Take-up of Grade A floorspace by Sector – 2015

9%

15%

46%

30%

RetailLogisticsManufacturerOther

Total: 17.2 million sq ft

Source: JLL

Take-up of Grade A floorspace by Region – 2015

2%18% 21%

29%

12%13%

South East / East / LondonSouth West & WalesWest MidlandsEast MidlandsYorkshire & HumbersideNorth WestNorth EastScotland

4%

1%

Total: 17.2 million sq ft Source: JLL

Key Deals in H2 2015Location Occupier Size (sq ft)London Gateway Logistics Park UPS 340,000Markham Vale, Derby Great Bear 479,285Rugby Gateway, Rugby DHL 235,000Central Park, Trafford Park XPO Logistics 250,000G-Park Wakefield, Europort Bibby 281,976Crossflow, Avonmouth Amazon 336,079

Retailers accounted for the largest share of floorspace taken up in 2015 (46%). Logistics companies were responsible for 30% of the total and manufacturers accounted for 15%. ‘Other’ companies, such as builders merchant Travis Perkins, recorded 9% of total take-up last year.

Logistics companies took 5.1 million sq ft of Grade A logistics space in 2015, the highest level of demand recorded by this sector since 2008.

Demand outlookWith the UK economy expected to grow this year at a broadly similar rate to last year, we expect UK big box take-up in 2016 to be comparable to 2015, but not to hit the level posted in 2014, the highest rate of take-up since 2010.


15million SQ FT

GRADE A 6%FLOORSPACE AVAILABLENATIONAL VACANC

Y R

ATE

At the end of December 2015, Grade A availability stood at around 15.0 million sq ft, of which 9.2 million sq ft was in new speculatively developed space including 6.2 million sq ft speculatively under construction in 31 units. The remaining 5.8 million sq ft comprised good quality second-hand space.

At the end of December 2015 total Grade A availability was 34% up on the level at mid-2015, following a long period of falling supply. The level of new supply was up by 50% and secondhand space was also higher – although by a much smaller amount (15%).

The above statistics reflect the fact that over the course of 2015 further big box speculative development took place bringing much needed supply to the market and this resulted in an overall increase in Grade A supply. However despite the pick-up in development, the availability of new supply remained well below (68% lower) the level it had hit before the recession.

Supply (Grade A units ≥100,000 sq ft)

0

5

10

15

20

25

30

35

H2 2015H2 2014H2 2013H2 2012H2 2011H2 2010H2 2009H2 2008H2 2007

Millio

ns sq

ft

New Secondhand Source: JLL. NB. Secondhand statistics not collected prior to 2010.

The overall level of availability represented a national vacancy rate of around 6% compared with our estimate of the total Grade A stock. The West Midlands, South West and Wales all have vacancy rates below the national average. There is no Grade A floorspace available in the North East.

Supply of Grade A floorspace by Region – December 2015

6%

16% 28%

21%

7%

14%

8%

South East / East / LondonSouth West & WalesWest MidlandsEast MidlandsYorkshire & HumbersideNorth WestScotland

Source: JLL

Key New Available Units at the end of December 2015Region Unit/Scheme Size (sq ft)South East Prologis Park, Dunstable 358,000London Heathrow Logistics Park 105,509South West Severn Distribution Park, Sharpness 167,000W Midlands Silver Bullet, Hams Hall 142,000E Midlands G-Park, Daventry 297,320E Midlands Northampton Commercial Park 303,824Y&H Wakefield Eurohub 190,000North West Logistics North Bolton 357,000Scotland Titan, Eurocentral 105,509

Compared with the annual average level of take-up over the last five years (2011-2015), available Grade A supply at the end of 2015 represented less than 12 months worth of demand. Coupled with a vacancy rate of just 6% this suggests that the market is still balanced in favour of investors / developers rather than occupiers and as a consequence we anticipate further rental growth throughout 2016.

Available supply


Speculative development

At the end of December 2015 there were 32 big box units speculatively under construction nationally totalling 6.5 million sq ft, of which one has been pre-let during construction – Ted Baker pre-leased Goodman and Anglesea Capital’s 323,895 sq ft speculative unit at Derby Commercial Park at the end of last year.

The East Midlands accounted for 10 of the 32 units under construction nationally and 2.1 million sq ft of development, including the unit pre-let to Ted Baker. There were eight units speculatively under construction in the North West, totalling 1.7 million sq ft, six units under construction in the Greater South East, totalling 1.3 million sq ft, and a further six units under construction in the West Midlands, totalling c.1 million sq ft. Yorkshire & Humberside and the South West each had just one unit speculatively under construction at the end of 2015.

At the end of 2015 we estimate that the development pipeline of big box schemes that could be speculatively developed over the next 12 to 24 months totalled around another 8.3 million sq ft nationally.

RentsJLL monitors 31 distribution locations nationally. Over the 12 months to the end of December 2015 prime headline distribution rents increased in 18 of the 31 locations nationally, overall increasing by 8.5% across all 31 locations. In addition to this, incentives have continued to come in over the last 12 months.

Our latest model-based forecasts suggest that, based on the IPD distribution warehouse market segment, rents will grow by around 3.7% pa over the next four years (2016-2019). However, this is a national average and we expect certain locations to see significantly stronger uplifts.

6.5million SQ FT

UNDER CONSTRUCTION

We expect overall occupier activity across the big box sector in 2016 to be broadly the same as 2015 as the UK economy is expected to grow at roughly the same rate. The growth of online retail will continue to be a key driver of demand across a range of facilities, sizes and location.

Given the low vacancy rate and development pipeline, we expect to see a further increase in speculative development activity this year. Around 3.6 million sq ft of new speculative space was delivered to the market in 2015. In 2016 we think this level will approximately double based on what is under construction now and our tracking of the development pipeline. But relatively limited supply will continue to drive rental growth over the year.

We believe that growing online sales and a wider move to more same day or next day delivery will drive demand for more parcel/postal facilities and local distribution depots in major cities. Amazon has already acquired a number of buildings in London and Birmingham to service it’s Prime Now service and Argos has become the first high street retailer to offer a same day service using its distribution and store network. Sainsbury’s bid for

the Home Retail Group was recently rejected, but watch this space.

Labour availability will become a critical success factor for industrial occupiers, developers and investors. There is a national shortage of lorry drivers, unemployment is low and the employment rate is high. As a result, logistics industrial property locations will need good local labour profiles.

We expect the investment market to deliver another solid performance. If we look at the existing yield premium over gilts and then at the weight of investor demand for good logistics assets, we still see some modest potential for further inward movement this year. However, the year has started with uncertainly over China and global stock market falls, whilst the referendum on the UK’s membership of the EU, expected later this year, also adds uncertainty.

Location as always will be critical to performance. Core distribution locations and locations in and around London where there is strong competition for land should deliver the best performance.

Talking Point:2016 predictions



0.2 0.2 0.4

1.6

0.0

1.9 0.1 0.20.7

0.60.2 0.4

2.1

1.1

3.1

0.0 0.0 0.2

1.10.7

2.5

2.0

0.2

1.51.0

0.6

1.8

0.0 0.1 0.1

0.50.1 0.1

Supply and take-up of new floorspace in the Big Box Logistics market at December 2015

This map compares new existing speculative developed supply with recent take-up.

At the end of December 2015 the immediate availability of new space was below the annual average take-up recorded over the past two years in a number of regions nationally.

Notes• All data are based on new units of 100,000 sq ft and over.• Take-up is based on the annual average of the two years, January

2014 to December 2015.• Total take-up comprises both speculative and build to suit take-up.• Figures refer to million sq ft.

New speculative supply at end December 2015

Speculative take-up

Total new take-up (speculative & build to suit)


Preliminary estimates of UK industrial investment volumes suggest that investment demand for both single-let and multi-let assets softened in 2015 compared to 2014. However 2014 was the strongest year on our records when £8.7 billion transacted. In the first three quarters of 2015 approximately £5.2 billion transacted; higher than the average level of demand over the five-year period 2010-2014 (£4.99 billion).

As has been the case over the past couple of years, last year saw strong demand from both domestic and international buyers as investors recognised the strong fundamentals underpinning the sector – including structural demand drivers, tight supply and good rental growth prospects. With a shortage of stock on the market and a large weight of money, we saw aggressive bidding for prime and secondary stock.

The strength of investor interest in the logistics market was further highlighted by the commitments to fund speculative developments.

Key Investment Deals in H2 2015Scheme/Unit Size (sq ft) Yield Price WH Smith, Birmingham 211,000 5.20% £18.221mEddie Stobart, Runcorn 365,388 5.93% £32.3mMatalan, Liverpool 578,108 6.27% £42.38mProject Click portfolio 5.90% £87.3m

At the end of December 2015 prime yields in London, assuming 15-year income, stood at 4.50%. Prime distribution yields in the

South East stood at 4.75% and prime regional distribution yields stood at 5.00%. Sharper yields have been achieved on exceptional opportunities. Prime distribution yields remained stable in 2015 but going into 2016 a downward pressure continues.

London, South East & Regional Prime Distribution Yields

3%

4%

5%

6%

7%

8%

9%

10%

Q42015

Q22015

Q42014

Q22014

Q42013

Q22013

Q42012

Q22012

Q42011

Q22011

Q42010

Q22010

Q42009

Q22009

Q42008

Q22008

Q42007

Q22007

Q42006

Q22006

Q42005

Q22005

Q42004

Q22004

Prime London distribution Prime South East distribution Prime regional distribution Source: JLL

*Assuming a 15-year lease with open market rent reviews.

We expect further strong investment activity into 2016: low interest rates, low inflation, steady economic growth and forecasts of strong rental growth will encourage investors to seek logistics opportunities in a market that looks well-positioned to deliver relatively good performance compared with certain other property sectors.

Investment market

PRIME DISTRIBUTION YIELDS AT DECEMBER 2015LONDON 4.50%

SOUTH EAST 4.75%

REGIONAL 5.00%

Downwardpressure 2016

STABLE 2015


• Total occupier demand in 2015 was 12% down on 2014; however 2014 had recorded the highest level of take-up since 2010. The level of demand recorded in 2015 was still 8% up on the annual average level of take-up over the past five years, 2011-2015.

• Grade A available supply increased in 2015 after a number of years of falling supply.

• Overall prime headline rents in the major markets rose over the course of 2015.

• Prime logistics yields in London, the South East and the regions stabilised over the course of 2015.

Conclusions

Market outlook• With a number of active requirements currently in the

market we expect occupational demand to remain robust in 2016.

• With a vacancy rate of 6% nationally at the end of 2015 we expect to see occupiers continuing to sign for new BTS units.

• There will be further big box speculative development this year in key strategic markets.

• Our model-based forecasts suggest that distribution rents overall will grow by 3.7% pa nationally over the next four years, but growth will be significantly stronger in selective locations.

• Investors will remain focused on acquiring prime product in prime locations, but there will also be strong interest in secondary stock in good locations due to a lack of available prime product.

• We believe that there is potential for yields to sharpen this year as the investment market remains strong and there is a lack of prime product available.

© 2016 Jones Lang LaSalle IP, Inc. All rights reserved. The information contained in this document is proprietary to Tetris Projects Limited and shall be used solely for the purposes of evaluating this proposal. All such documentation and information remains the property of Tetris and shall be kept confidential. Reproduction of any part of this document is authorized only to the extent necessary for its evaluation. It is not to be shown to any third party without the prior written authorization of Tetris. All information contained herein is from sources deemed reliable; however, no representation or warranty is made as to the accuracy thereof.

The UK Big Box Market – January 2016eal about real estate’

jll.co.uk/industrial-logistics

UK Logistics contacts

Occupational

Richard Evans Director National Industrial & Logistics+44 (0) 20 7087 [email protected]

Michael AldertonDirector National Industrial & Logistics +44 (0) 20 7087 [email protected]

Cameron MitchellDirectorNational Industrial & Logistics+44 (0)12 1634 [email protected]

Carl DurrantDirector National Industrial & Logistics+44 (0)12 1214 [email protected]

Daniel BurnDirectorNational Industrial & Logistics+44 (0) 16 1238 [email protected]

Paul Baker Director National Industrial & Logistics+44 (0) 11 7930 [email protected]

Richard HarrisDirectorNational Industrial & Logistics+44 (0) 11 3235 [email protected]

Kirsty PalmerAssociate DirectorNational Industrial & Logistics+44 (0) 13 1243 [email protected]

Investment

Philip Marsden Director National Investment +44 (0)20 7087 [email protected]

David Emburey Director National Investment +44 (0)20 7399 [email protected]

Joel DuncanDirectorNational Investment+44 (0)20 7087 [email protected]

Allan WilsonDirectorNational Investment+44 (0)12 1214 [email protected]

Development

Chris NorthDirectorNational Investment+44 (0) 20 7087 [email protected]

Lease Advisory

Michael HancockDirectorNational Industrial & Logistics+44 (0)20 7399 [email protected]

Research

Jon SleemanDirectorUK Research+44 (0) 20 7087 [email protected]

Tessa EnglishAssociate DirectorUK Research+44 (0)20 7087 [email protected]

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