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Shed loads of demand for distribution space triggers return of developer confidence says Savills

wantspacegotspace.co.uk - Shed loads of demand for distribution space triggers return of developer confidence says SavillsAccording to the latest Savills Big Shed Briefing, take-up of industrial space in 2013  by retailers and 3PLs is expected to outperform the five year average, topping 20 million sq ft (1,858,000 sq m), and will cause a severe constraint on supply.  As a result, the firm states D&B activity is up 55% year on year.

Savills reports noteworthy D&B deals in 2013 so far include Travis Perkins 700,000 sq ft (65,030 sq m) retail warehouse at Omega North, Warrington, John Lewis taking 668,918 sq ft (62,142 sq m) at Magna Park, Milton Keynes and M&S decision to take 900,000 sq ft (83,610 sq m) at London Gateway.

Charles Spicer, Associate Director at Savills, comments: “All size bands and all regions are becoming severely restricted for Grade A space in prime locations and as a result, a further 10-15% increase in D&B is anticipated before year close to total circa eight million sq ft. Despite a national shortage, there are particularly noteworthy constraints in the South East, where take-up activity has been rife to year date, and the North West where there is only 5% vacancy rate.”

Pressure on supply has also prompted the first speculative developments since the downturn with IM Properties beginning on-site at Birch Coppice, Tamworth with a 168,934 sq ft unit. Roxhill are developing a 110,000 sq ft at Brackmills in Northampton which has been presold vacant to Hamdon Gate. Prologis are also spec building with 310,000 sq ft at Dunstable and 225,000 sq ft at Ryton.

Charlie continues: “The lack of Grade A space is causing a rippling effect throughout the sector, triggering D&B deals, speculative development and also resulting in the letting of stock which previously stood empty prior to the downturn.  An example of this is The Duke, Staffordshire which let to Clipper to fulfil a Super Group contract.  We are witnessing an upward pressure on rents, Freeman and LG Electronics have recently agreed 175,000 sq ft and 165,000 sq ft pre-lets at Ryton both with a headline rents in excess of £5.75 per sq ft.”  The industrial occupiers who are unwilling to pay the premiums attached to pre-lets are turning to the second-hand market and good quality second hand space in prime locations is also shifting quickly.

Against an improving occupational story, Savills also notes the growing investor interest in the sector, offering attractive risk adjusted returns, low obsolescence and above average lease lengths without the rental volatility experienced by offices and retail.  The firm states that interest in distribution warehouses has driven yield compression and seen the sector outperform all other property sub-sectors delivering total returns of 7.1% during 2013 year to date (IPD Total Returns Jan – Aug 2013).

Savills predicts market conditions will continue to improving with E-tailing further impacting distribution warehouses and driving demand. Online sales currently account for just 11% of total sales in the UK but M&S and John Lewis’ recent deals are signs of the UK’s biggest retailers gearing up to increase their online offering.  Q4 2013 is expected to see less recessionary conditions as an improving consumer appetite ensures retailers return to the market and as demand for distribution space continues to outstrip supply, rents will rise and yields will fall for the best placed.

Posted by The Editor (wantspacegotspace) on 28th October 2013

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