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Property acquisition in a challenging market by Nick Ford of Bulleys

The Governor of the Bank of England has recently given his opinion that the UK economy will shrink again within the next 12 months – so nothing positive on the economic front!

Despite the ongoing economic doom and gloom, there are a number of manufacturing sectors that are trading well and expanding. Bulleys Chartered Surveyors have a number of active client acquisition requirements – most of which are for occupier clients in the manufacturing sector – including the steel, automotive and construction products.

This is a positive step, as for some time, the motives behind many requirements have been downsizing, or cost saving through moves to more efficient buildings. This isn’t to say that the picture is rosy – but there are some brighter lights.

On the whole, take up of industrial space across the West Midlands has been improving over the past year or so, however, to look at the market in general terms can be misleading. The market is highly polarised in terms of both supply and demand.

On the supply side, we have seen virtually no new stock delivered since the last of the pre-recession speculative units were completed – albeit some are still available. Stock coming to the market has been limited to churn – often with tenants / vendors marketing existing buildings well before they have identified new premises (introducing residential-style chains), or units coming to the market through business failures. This has led to a steady increase in the average age of existing stock, and the corresponding decrease in quality. The greatest shortage of stock is for modern mid-sized freehold buildings – particularly in the Black Country.

Demand is equally patchy – again with hotspots. There are many examples of freehold purchasers being outbid for a property – in the same market where good buildings have been standing vacant for 5+ years.

Taking the occupier’s view, the market conditions present some significant challenges. There are still no real prospects of any speculative development in the near future and built to suit solutions can be marginal at reasonable rents or freehold prices. This means that, unlike in the past when there was a ready pipeline of new buildings coming to the market, it is difficult to predict availability in the near future as it is now wholly dependent on the churn of existing buildings. Occupiers must, therefore, heed the warnings from the TV sales adverts – “when it’s gone, it’s gone”.

There are some important messages for the occupier embarking on a search for property:

Value

Property values are still depressed, but pockets of competition for stock can have significant impact on value. Also, landlords’ and vendors’ perspectives of rental levels and values can often be influenced by historic book values.

Timing

Due to the patchy availability of stock, it is important to plan well ahead and get a good understanding of the market at an early stage. In order to ensure business continuity, it may be necessary to commit to a new property well ahead of a lease expiry – if the right building is available. In some cases, the only available solution may be a new build which carries higher values and longer timescales.

On a positive note, few landlords are keen to see their tenants vacating at lease expiry, so there is a greater opportunity for flexibility at lease end than is the case in a strong market when re-letting is easier.

Compromise

Whilst the investment required for a new facility is very significant for a business – including the property, fit out and relocation costs, and it is important to invest in the right property, it is important to recognise that it is often difficult or impossible to find a perfect fit, and so a compromise solution which is the best fit available is generally the best option.

Certainty

The most important consideration for an occupier is business continuity. It is essential therefore to fully understand and appreciate the challenges of a property move at the outset, which include programme and deadlines, understanding of the space requirement, availability and budgeting.

Posted by The Editor (wantspacegotspace) on 10th December 2012 (updated 08/07/2013)

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