Big Shed Briefing January 2016 - Savills UK

Savills World Research
UK Logistics

Big Shed Briefing January 2016

DC1 at Prologis Park Dunstable where Amazon took 310,000 sq ft. Across the UK Amazon accounted for 10% of all space transacted

SUMMARY

■ Supply has increased in 2015 by 11% ft in the final quarter on account of two “2015 was another strong
from the record lows that were reached speculatively delivered units entering our year in the occupational and
in the first quarter of the year. Supply at supply statistics.
a nationwide level now stands at 34m
sq ft with a nationwide vacancy rate of ■ The occupier market remains robust investment market. Given the
8.04%. take-up trends we have seen
with take-up reaching 24.1m sq ft, above and the lack of supply of larger
■ The market is typified by units being the long term average of 22m sq ft. By
of a smaller and poorer quality with 72% deal count the number of transactions
of units classified as grade B or C and
only 7.5% of units on the market over surpassed 100 for only the second time units a case could be made
300,000 sq ft. on record. to speculatively develop even

■ We expect our supply statistics to be ■ The investment market followed
increasingly volatile throughout 2016
as we are currently tracking 7.1m sq ft, larger units than currentlyoccupier trends with £3.12bn transacted,
across 39 schemes, to be delivered in planned”the second highest year on record and
2016. For example, supply in the South Kevin Mofid, Head of
East increased by over half a million sq significantly above the long term average
of £1.6bn per year. Whilst investor Industrial & Logistics Research

sentiment remains strong we do not

envisage significant downward pressure

on our prime yield of 4.5%.

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UK Logistics | Big Shed Briefing

Availability Take-up ■ The “Golden Triangle” and
surrounding areas have long been
■ Across the UK the supply of existing ■ At a Nationwide level take up in the the traditional heartland of the UK
warehouses over 100,000 sq ft logistics sector, for units over 100,000 logistics market and 2015 has proved
increased in 2015 by 11% to 34m sq sq ft, has reached 24.1m sq ft. Whilst no different with the combined East
ft across 200 schemes. It should be this is 9.5m sq ft down on a record 2014 and West Midlands accounting for 38%
noted that the percentage increase is of 33.6m sq ft take up levels are 9.5% of all take-up. The average deal size in
coming from a low base as the start above the long term average of 22m sq the Midlands for 2015 was 218,000 sq
of 2015 had the lowest ever recorded ft per year. ft against a national average of 255,000
supply figures decreasing by 67% sq ft. This a direct impact of the lack of
from the record highs of 94m sq ft in ■ In terms of deal count alone Savills supply for larger units and hence cost
2009. Using the stock figures Savills recorded information on over 100 conscious occupiers have looked at
have produced with the UKWA the transactions, which is the second cheaper locations for BTS units.
nationwide vacancy rate is now 8.04%. highest year ever recorded.

■ The market is characterised by units ■ Some press coverage in 2015 ■ The impacts of omni-channel retail
being of a poorer quality and smaller suggested that the era of the "Mega on the market have been discussed
size. Savills classify 72% of the sq ft shed" was coming to an end. Our widely and in 2015 the impact has
on the market to be grade B in quality analysis demonstrates that the larger been clearly demonstrated. Amazon
and below, also just 16% of the units size bands are performing better as deal alone accounted for 10% of the floor-
on the market are over 300,000 sq ft. volume over 300,000 sq ft increased by space transacted, and combined online
For units over 500,000 sq ft occupiers 18% from 2014 to 2015, whereas deal retailers and parcel delivery companies
have just one option, the Sherburn 550 volume for units below 200,000 sq ft made up 20% of the market.
unit in Yorkshire. Once this unit is let decreased by 47%. Indeed 14.3m sq
the largest grade A units on the market ft was transacted in this size band in Development Pipeline
are both 380,000 sq ft: J4M8 in West 2014 compared to 7.4m sq ft in 2015.
Lothian, and DC 380 in Harlow. We believe that this decrease in take- ■ Since 2013 73 schemes have been
up is caused primarily by supply side announced across the country which
■ Of the core logistics regions, the constraints that will be addressed as total 13.6m sq ft, to place this in context
North West has the highest amount of increased speculative developments from 2005 to 2009 40.47m sq ft was
supply totalling 7.71m sq ft, it should be complete in 2016. delivered across the country.
noted it also has the highest amount of
grade C stock which is arguably not fit ■ Another key trend of 2015 has been ■ The average sized unit being delivered
for purpose in the omni-channel supply the increased prevalence of the Build- is currently 186,397 sq ft, indeed just
chain. The South East has seen supply to-Suit sector (BTS) which in 2015 9 units have been announced over
increase to 4.7m sq ft as speculative made up 44% of the market, the 300,000 sq ft, the largest being Prologis
units enter our supply figures. Units highest level since 2008. As previously Park in Dunstable at 358,000 sq ft due
such as the Angle 265, developed by mentioned, this has been driven by a for delivery in Q2 2016.
Goodman and Anglesea Capital and lack of supply in the market for larger
Prologis at London Gateway account units. Therefore if occupiers are not ■ Throughout 2015 3.3m sq ft was
for 581,000 sq ft. Our supply statistics prepared to compromise on either delivered to market of which 25%
will be increasingly volatile throughout location, size or unit quality then BTS is has already been let. Of the schemes
2016 as speculatively constructed the only remaining alternative currently announced and under
units enter our supply figures and are construction Savills are currently
subsequently let to occupiers. tracking 7.1m sq ft due for delivery in
2016 across 39 schemes.
GRAPH 1
GRAPH 2
2015 take-up remains above average
Increased Build-to-Suit prevalence

40 180 100%
160
35 140 90%
120
100 80%
80
30 60
40
20 70%
0
25 2015 60%
Sq ft (millions)
20 Deal Count 50%

15 40%

30%

10

20%

5 10%

0 2008 2009 2010 2011 2012 2013 2014 0% 2011 2012 2013 2014 2015
2007 Take-up (LHS) Long term average take-up (LHS) Deal Count (RHS) 2010 New

Second Hand BTS Let prior to PC

Graph source: Savills Graph source: Savills

02

January 2016

Investment GRAPH 3

■ Full year investment volumes in 2015 Supply starts to rise from historic lows
in the logistics sector have reached
£3.12bn, with almost £700m of stock 100
transacted in the final quarter.
90
■ Whilst this is a decline from the record
volumes of 2014 it should be noted that 80
2015 is now the second highest year
on record with almost £1.5 billion more 70
than the long term average of £1.6
billion transacted. Sq ft (millions) 60

■ The largest deal for a single unit in 50
2015 was Tritax Big Box Reit forward
funding a new Customer Fulfilment 40
Centre for Ocado at Erith in Kent, the
purchase price of £98.9m reflecting a 30
net initial yield of 5.25%. The largest
portfolio sale of the year was Logicor 20
purchasing a portfolio of 16 units for
£388m in April. 10

■ As the year progressed investors 0 2010 2011 2012 2013 2014 Q1 15 Q2 15 Q3 15 Q4 15
started to deploy capital into the 2009
sector through development funding
opportunities. We estimate that Graph source: Savills
of the 44 schemes announced in
2015, 41 per cent attracted forward GRAPH 4
funding commitments from third-party
investors or major institutions. Indeed, 2016 development pipeline
these forward funding commitments
accounted for £247m of deployed Sq ft (millions) 1.8 West Midlands
capital, equating to just shy of 10 per 1.6 North West
cent of the total investment market for 1.4 East Midlands
logistics. 1.2 South East
Yorkshire
■ Savills prime yield for distribution 1 Inner M25
warehouses is currently 4.50% having 0.8
moved in 125bps over the past two 0.6 South West
years, but just 25bps in 2015. Whilst 0.4
investor sentiment towards the sector 0.2 Qtr4
is still strong we are seeing investors
become increasingly discerning when it 0
comes to stock selection. Qtr1

Qtr2

Qtr3

Graph source: Savills

GRAPH 5 £ billion

Distribution Warehouse Investment volumes

£4.5
Q1 Q2 Q3 Q4 Rolling average

£4.0

£3.5

£3.0

£2.5

£2.0

£1.5

£1.0

£0.5

£0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Graph source: Savills/ Property Data

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UK Logistics | Big Shed Briefing

OUTLOOK GRAPH 6

Speculative delivery and Where will investment volumes settle?
subsequent deals will see supply
levels become increasingly volatile £4.5 30.00%
into 2016.... Q1 Q2 Q3 Q4 IPD Distribution Total Return
FORECAST
■ Savills are tracking at least 4.8m sq ft of deals £4.0
that are due to complete in the first quarter of 2016. 25.00%
Bearing in mind that the quarterly average is 5.5m sq £3.5 20.00%
ft we therefore expect another above average start to 15.00%
year. £3.0 10.00%
5.00%
■ Speculative development has seen total supply £2.5
figures creep upwards into 2016. However, given that £ billion
7.1m sq ft is due for delivery in 2016 we expect that Total Return %
supply statistics will be volatile. Furthermore, given £2.0 0.00%
the lack of existing supply for larger units there is an
argument that developers could look to speculatively -5.00%
deliver units over 400,000 sq ft. £1.5

■ With investment volumes in the sector comfortably -10.00%
outperforming the long term average in the last three £1.0
years it perhaps time to consider where "the new
normal" for the sector lies, particularly given the -15.00%
structural shift in retail habits which is driving the
occupier market. Looking at the historic relationship £0.5 -20.00%
between volumes and total returns, suggests that as
returns stabilise around 10% per annum then the new £0.0 -25.00%
normal for investment volumes in the sector will settle 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
between £2.5-3bn per year
Graph source: IPD/RealFor/Savills Key Investment Data

Key Occupier Data Big Shed Prime Yields
Long term income: 4.50%
Current Grade A / new supply (over Medium term income: 5.25%
100,000 sq ft): Short term income: 5.75%
9.5m sq ft, down 8% year/year
Average Price Weighted Yield
Average annual take-up: 2015: 5.90%
22.02m sq ft 2014: 6.53%

2016 speculative development
completions:
7.1m sq ft (39 schemes)

Vacancy rate: 8.04%

Please contact us for further information

Richard Sullivan Toby Green Ranjit Gill Jon Atherton Dave Robinson
Director - Birmingham Director - Manchester Director - Leeds
National Head of Industrial Director - South East +44 (0)21 634 8402 +44 (0)161 277 7207 +44 (0)113 220 1218
[email protected] [email protected] [email protected]
+44 (0)20 7409 8125 +44 (0)20 7409 9903

[email protected] [email protected]

Rob Cleeves William Rose James Williams Simon Collett Kevin Mofid
Director - Bristol Director - Peterborough Director - UK Investment Building Consultancy Research
+44 (0)1179 102 227 +44 (0)1733 201 391 +44 (0)20 7409 8785 +44 (0)20 7409 5951 +44 (0)20 3618 3612
[email protected] [email protected] [email protected] [email protected] [email protected]

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