Round table report: a deep dive into industrial and logistics developments

A deep dive was taken into the industrial and logistics market by a panel of property experts, who delved into the record levels of activity across the West Midlands and the state of the market now. 

With industrial and logistics developers and businesses alike attracted to the region, thanks to its advantageous central location and great transport links, developers and agents joined TheBusinessDesk.com and co-hosts and sponsors Nimbus Maps to understand exactly what is happening within the sector.

Leading prop-tech firm Nimbus Maps is aiming to publish a white paper on the I&L market, with some useful datasets to assist those within the industry.

Henry Bellfield, managing director of Barberry Developments, reported that last year the firm was achieving around £150 per sq ft for EPC A-rated mid-box spaces.

He said, “When the market started to really change early last year, we were typically selling to the investors because the yields got so low and the occupational market was so strong, you’ve got occupiers struggling to pay a price”.

Toby O’Sullivan, director of Watling Real Estate said the company has become busy in this space because there’s been a complete market reset.

He’s found that there’s a “wide range of property coming through our corporate customers, where they’ve leveraged it to the hill. The lenders are going easy on any LTV breaches, but any missed repayments and then all of a sudden it gets passed to the recoveries team and then we get involved. 

“A lot of larger industrial stock is coming through – we recently sold a 200,000 sq ft property in Milton Keynes. Manufacturing firms are seeing cash flow issues, supply chain issues because of Ukraine and various other reasons, high-interest rates, high inflation, consumer changes”.

After values rose to record levels, the room said there has been a very drastic drop off in values. 

Henry Bellfield believes it has been driven by many factors, and “partly been driven by the yields. So if we did say 4% or sub 4%, back in the top of the market, I think probably now its more like five and a quarter with perhaps further outward pressure”. 

Experiences were echoed by Toby O’Sullivan, who revealed that he had placed a big industrial property on the market in August 2022, it was sold three months later at 40% below the value it was two months prior. It was an open market sale under offer at £11m. 

For Rob Barker, property director at Potter Space, after talking to banks in November about long-term financing, he said their “crystal balls were giving a 4.5% interest rate. It’s the uncertainty that’s unsettled everything”. 

As supply continues to fall short of demand as well as a drop in value, it’s also had a big impact on land pricing says Jon Ryan-Gill, partner and co-head of the Birmingham office at Gerald Eve

He said: “If you’re buying now at an 8% finance cost and you’ve got interest on that, and then there’s a delay of a year or two years due to build costs, the interest is huge and can wipe out a lot of profit and might leave you in negative territory. We’ve all been excited to see million pound plus land prices (if you’re on the selling side) – but now in some instances, it has just been wiped down to nothing”.

Ed Siddall-Jones, director of agency Siddall-Jones, who is active in the secondary and tertiary markets, revealed poorer quality sheds are still getting picked up at £80 per sq ft. 

He said however that, “two or three years ago, you could pick up a shed around £45 or £50, spend 20/30 grand and you’d have a decent shed. Now that the values have moved that high with the increase in building cost, it’s not really feasible anymore. It’s very difficult”. 

“A two-tier market is coming, where we might end up with a premium on the greener buildings” believes Rob Parker. 

EPC rating was a huge discussion point, as Jon Ryan-Gill pointed out that many companies will be taking five or 10-year leases which will see them have to become B-rated or above by 2030. 

He said: “And as regulation changes, there’s data that reveals that more than half the buildings out there are going to be non-compliant”. 

Companies with properties that will be non-compliant have growing concerns said Toby O’Sullivan. 

 “In the last six months, certainly we’re getting a lot of calls from all our lender clients saying we’ve got 60% of our lends out on properties of E rating what’s going to happen?

“The next question then is what is going to happen? What impact is that going to have on value at the next step change? And is that going to signal an LTV breach?”.

But as Rishi Sunak scales back the UK’s net-zero commitments, will the industry follow suit?

“Investors and funders have made a lot of pledges beyond the government that they want to stick to” felt Jon Ryan-Gill.

“The likes of Aviva, NatWest, and HSBC won’t invest the same into those who don’t have the highest green ratings. It sometimes slips down on the political agenda, but it’s not going away” said Toby O’Sullivan.

Tom Price, director of capital deployment & leasing at Prologis said that as the company leases to the biggest global companies and “they have the most stringent corporate compliance ESG regulations, and it needs to be at least EPC B, normally A-rated project with a certain amount of renewable energy”.

“Every building we’ve built since 2006 has been net-zero in construction in the UK. We’ve got a building in Coventry built in 2014 at 166,000 sq ft that we’ve refurbished at EPC A, but even that building was Net zero in construction so it ticks the box for the likes of DHL who has really strict green corporate compliance policies.

“The buildings we build are in the best locations they’re really good standard and high quality buildings for the long term”. 

Everyone agreed that the levels of activity skyrocketed but have returned to pre-pandemic levels. 

Henry Bellfield said it was the pandemic and Brexit that, “supercharged the demand across quite a wide range of businesses. We saw a market which just went up to record levels”.

At the time Tom Price felt “almost disappointed if you didn’t let the building before the completion! 

“We’re in the process of refurbishing a 330,000 sq ft 20-year-old building to EPC A. The refurb doesn’t finish till December, but we’ve let it already. 

“Growth in E-commerce has been a general trend, as 19% of all sales in 2019 were online, which grew to 37% during Covid, it’s now down to 26%”.    

Research undertaken by Watling Real Estate has found a death in online sales, suggesting that there is a small return to the high street. 

One PE client of Watling “invested in a business that produces and delivers garden furniture at a multiple of 11/12 EBITDA, six months ago it’s back down to five or six which is at a normal level” revealed Toby O’Sullivan.

“The business operates big warehouses and firstly they’ve got supply chain issues, transportation issues, warehouses are absolutely full but the demand has gone after people bought those products in lockdown”.

But are sheds still a good place to invest asked Nimbus Maps? 

Jon Ryan-Gill believes the secondhand market is going to have a “big impact on rents”.

He said: “There’s a whole building industry around that which is still probably in its infancy as to how it needs to be implemented. Landlords are going to be the ones largely picking them out”.

The change in use class order to E has also, “made it a lot more flexible for these quasi-uses and sheds have a massive function for all of that.

“Some of those buildings used to have even much higher rents than the sheds are now. Depending on the size, there’s probably more headroom because of bringing that planning use class in.

“It’s less restrictive and more flexible”. 

For Tom Price, “the West Midlands is a great location, from the access to labour point of view, for people to work in warehouses, from the connections point of view with the motorway networks. 

“And if you have the right quality buildings and the right locations, then it’s a great place to immerse yourself”.