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There is all to play for in a year of two halves; As global real estate advisor, JLL, publishes its latest Big Box Industrial Report, we catch up with Cameron Mitchell, head of UK industrial & logistics in JLL's Birmingham office to tell us why this year will definitely be a game of two halves and how the industrial sector looks set to grow.

Byline: Cameron Mitchell

WELL it's interesting, " says Mitchell. "If you just looked at the stats for the first half of 2014, you might be slightly disappointed. They actually show that occupier demand fell back, yet we know from being on the ground that it's a very different picture building. Clearly the market isn't back to pre-economic downturn days but it's certainly far more robust. We've done some sizeable deals this year. And really the only thing holding things back is supply and not just in the West Midlands but the UK as a whole.

Figures for the West Midlands show that 1,094,320 sq ft was taken up of Grade A quality distribution units of 100,000 sq ft and over for the first half of 2014, compared to 3,374,220 in the same period last year. The same trend was experienced across the UK as a whole with 6.4 million sq ft being taken up in H1 2014, 23 per cent lower than H2 2013 of 8.3 million sq ft.

Mitchell continues: "It's an overhang from the downturn when speculative development ground to a halt and now that the market has returned, most of the prime properties have been mopped up and we've got a shortage. Not rocket science really but a situation which takes time to rectify.

"The market is beginning to correct itself, however. We saw speculative building return here first in the Midlands and now we're seeing far more spec development in the north-west, London and the south-east, although modest compared to pre-recession times."

Across the UK, six units have been completed speculatively. A further eight are under construction at present, representing 1.2 million sq ft. 12 of these are between 100,000 sq ft and 200,000 sq ft and 1 is between 200,000 sq ft and 300,000 sq ft and 1 is over 300,000 sq ft.

"Built-to-suits are still outnumbering spec builds and this trend may continue." reports Mitchell. "We've been involved in three major built-to-suit deals, providing purpose built facilities including 165,000 sq ft warehouse at Prologis Park, Ryton for LG Electronics subsidiary, Hi Logistics; 231,000 sq ft also at Ryton for UK Mail and 170,000 sq ft warehouse for Freeman at Ryton."

"For these, there simply weren't any existing buildings available which fitted the bill. But this isn't just down to supply its also down to the increasingly sophisticated requirements of logistics. The growth of on-line and multi-channel retail means that a fundamentally different type of warehouse is often needed from the first generation of sheds available which may be 20 to 25 years old."

"So the market is clearly changing because how we do business is changing. However, I do think we will see a much rosier set of stats in the second half of 2014. Some of the new generation of speculative builds will be coming on stream and probably many of those will be taken up before practical completion.

"There is also a gathering of developers, big established names such as Prologis, Goodman, Gazeley and Roxhill with Segro who will pick-up the momentum in the market. Plus I believe we'll see a couple of new entrants on the scene backed by funds."

As is the laws of economics, a shortage of supply pushes up demand and in turn prices. And prime industrial land is at a premium at the moment.

"Land prices are rising quickly," reports Mitchell. "We've seen some strong increases over the past few months. The investors know there is a shortage of buildings and that the market is gradually returning and so as the economy picks up, so is the appetite for buying up strategic sites for development.

"Accessibility is key for industrial land, with links to the motorway. M6, M1 in the 'Golden Triangle' and in Birmingham, M42 and M6 are all attracting huge interest."

JLL was recently involved in selling a 40-acre site to industrial giant, Prologis, next to its Ryton Industrial park in Coventry. The site was sold on behalf of landowner, Ryton Properties and attracted strong interest from a number of investors and developers.

"The only issue with land," adds Mitchell "Is that there isn't enough of it. But we expect a lot more to be coming through in the next 12 months."

It seems also that the speed of deals is quickening too states Mitchell: "There was a period when everyone was so risk averse that the time it took to do a deal was almost painful, but I'm pleased to say the pain is easing and I'd say in some cases deals are completing marginally quicker. Competition for buildings certainly plays a big factor."

If we look at growth markets for 2014, one would expect manufacturing for the West Midlands and its associated suppliers to have had a massive impact on the market.

"Certainly we have seen an increase in take-up in this sector, " says Mitchell "But it's not massive in proportion to overall figures - perhaps 30 per cent of the total market and of this, it has been mainly from automotive parts distributors."

Retailers continue to be the most active source of demand, accounting for 50 per cent, 3.2 million sq ft of all Grade A take-up in H1 2014, compared with 43 per cent during 2013.

Waitrose took almost 940,000 sq ft at Magna Park, Milton Keynes in H1. Asda too took three units in the first half of this year, all of which were in the Greater South-East and two of which will be used to fulfill online orders.

"All retailers continue to look at ways to consolidate and increase efficiencies." says Mitchell. "And at present the budget supermarkets are leading the pack. The likes of Aldi and Lidl are certainly increasing their requirements, reflecting a rise in popularity.

"Internet retailing too continues to evolve and interestingly such is the pace of change in this market, that we are seeing a growth of third party logistics as retailers outsource their distribution rather than handle it themselves. It's almost impossible to predict what they will need in one, two or three years time, so they use specialists who can react quickly to the changes."

And as occupier demand rises so too will rents. "Headline prime distribution rents in the major markets have remained broadly unchanged in the first half of 2014, however we are seeing net effective rents continue to harden as the incentives available to tenants fell further.

"The tide is turning away from the occupiers market that we have had for some time and a lack of available prime space is making the market more landlord favorable and quoting rents in core regions saw notable growth in H1, 2014."

So it would seem there is everything to play for in the second half of 2014 and the Midlands is strongly placed to take advantage of the upward trend.

"It's not quite like the good old days but it feels better to back in the thick of it." says Mitchell "And I believe we can look forward to continued strengthening in occupier and business demand, with more deals definitely on the way."


Purpose built facilities for UK Mail at ProLogis Park at Ryton
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Publication:The Birmingham Post (England)
Geographic Code:4EUUK
Date:Jul 10, 2014
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