logistics & industrial - winter 2015 - knight...
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LOGISTICS & INDUSTRIAL CAPITAL MARKETS UPDATE WINTER 2015
HIGHLIGHTSDistribution is one of the UK’s strongest performing economic sub-sectors, recording year-on-year growth of 3.8% in Q3 2014 against 3.0% for the economy as a whole.
Confidence is improving in the occupier markets, with UK wide take-up in H1 2014 up 17% on H2 2013 and 22% above the bi-annual average.
Reflecting the strength of demand for industrial assets, investment activity in the sector reached over £6bn in 2014, eclipsing the previous high of 2006.
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THE TEAMCAPITAL MARKETS AGENCY
Charles Divall +44 (0)20 7861 1683 [email protected]
Richard Claxton +44 (0)20 7861 1221 [email protected]
Johnny Hawkins +44 (0)20 7861 1519 [email protected]
Nick Cripps +44 (0)20 7861 1532 [email protected]
Will Gubb +44 (0)20 7861 1595 [email protected]
Campbell Beaton +44 (0)20 7861 1209 [email protected]
Alex Springer +44 (0)20 7861 5143 [email protected]
PROFESSIONAL
Simon Warren +44 (0)20 7861 1155 [email protected]
RESEARCH
Nejc Jus +44 (0)20 7861 1547 [email protected]
Charles Binks +44 (0)20 7861 1146 [email protected]
Rob Taylor Manchester office +44 (0)161 833 7714 [email protected]
Paul Mussi +44 (0)20 7861 1550 [email protected]
Rebecca Schofield Sheffield office +44 (0)114 272 9750 [email protected]
Andy Hall +44 (0)20 7861 1154 [email protected]
Russell Crofts Bristol office +44 (0)117 917 4535 [email protected]
Neil Francis Wales +44 (0)292 044 0147 [email protected]
Gus Haslam +44 (0)20 7861 5299 [email protected]
Jon Ryan-Gill Birmingham office +44 (0)121 233 6454 [email protected]
Simon Capaldi Scotland +44 (0)1312 229 621 [email protected]
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LOGISTICS AND INDUSTRIAL WINTER 2015
In 2014 Knight Frank’s occupier team leased 10m sq ft of industrial & warehouse space nationwide.
In 2014 Knight Frank transacted £1.72bn of industrial & logistics assets of which £890m were disposals and £830m were acquisitions.
Knight Frank’s Industrial Capital Markets team offers a dedicated and fully integrated approach combining professionals from both agency and research. Our recent clients include private and institutional investors, including TIAA Henderson Real Estate, Aviva Investors, Aberdeen, Threadneedle, L&G, M&G Real Estate & CBRE GI, among many others. With a positive momentum expected to continue in 2015, the team
is looking forward to working with both existing and new clients as the market continues to build.
Our clients benefit from Knight Frank’s established international network, which boasts particular exposure to private investors in the UK and overseas. For all support in acquiring or disposing of assets, please do not hesitate to contact a member of the Industrial Capital Markets team.
INDUSTRIAL PROPERTY INVESTMENTInvestor sentiment towards the UK industrial sector is remarkably positive, underpinned by the structural shift towards E-commerce and the tight supply of good quality space in the occupier market. Knight Frank has played its part, advising on a large number of industrial investment transactions across the UK.
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MARKET OVERVIEWKnight Frank expects the positive momentum around the industrial sector to continue into 2015, with investor demand for all types of logistics and industrial assets continuing to outstrip supply.
Reflecting the strength of demand for industrial assets, investment activity in the sector reached over £6bn in 2014, eclipsing the previous high of 2006. This compares with £5.1bn of investment turnover in 2013.
UK Institutions and Quoted Property Companies were the most active investors during 2014, while Overseas Investors have capitalised on an improving market and realised their profit (Figure 2).
According to IPD, industrial is the strongest performing UK property sector if Central London Offices are discounted. Over the 12 months to November, industrial total returns reached 24.6%, underpinned by capital growth of 16.7%. Total returns are only slightly below the 20-year peak of 25.3% recorded in October.
The outlook is also positive for the sector moving forward. While the pace of capital growth is expected to ease down, IPF’s latest consensus forecast places Industrial as the lead performing sector over the medium-term, with annual total returns of 10.5% p.a. up to 2018, vs 9.2% p.a. for All Property.
Tight supply is also putting upward pressure on rents, particularly in and around London. While UK Industrial rental growth stands at a relatively modest 2.8% over the year to November, this is the fastest rate of growth in the sector since December 2001. Rental growth is expected to strengthen and ripple out to the main regional markets in 2015.
Prime properties in core locations remain keenly sought after, with a depth to UK institutional and overseas appetite.
Covenant strength remains key to pricing, with prime assets benefitting from inflation-linked leases. Shorter income prime logistics assets have also attracted significant interest since H2 2013, resulting in substantial yield compression.
More recently, the market has witnessed a notable improvement in demand for secondary assets, with increased institutional appetite for risk. This shift in sentiment is linked to the improvement in occupational demand coupled with a shortage of available stock. That said, demand for secondary and tertiary logistics assets remains mixed according to quality, location and lot size.
FIGURE 1
Industrial and logistics investment transactions (£ million / year)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
Source: Knight Frank Research
FIGURE 2
Net investment comparison (£m) 2014 vs 2010
-800
-600
-400
-200
0
200
400
600
800
1,000
1,200
1,40020102014
Oth
ers
Occ
upie
rs
Priv
ate
Ind
ivid
uals
Ove
rsea
sIn
vest
ors
Priv
ate
Pro
p C
o
Quo
ted
Pro
p C
o
UK
Inst
itutio
ns
Source: Knight Frank Research
IPF’s latest consensus forecast places Industrial as the lead performing sector over the medium-term.
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FIGURE 3
Distribution yields (%)
Arla Foods, Hatfield Business Park, HatfieldIn October 2014, Knight Frank advised UBS on the acquisition of Arla Foods at Hatfield Business Park from Goodman. The unit was let to PCL 24/7 Limited (Guarantee from Arla Foods) with an unexpired lease term of 13.7 years. Pricing remains confidential.
Waitrose, Magna Park, Milton KeynesIn June 2014, Legal & General forward funded the development of a major distribution warehouse let to Waitrose from the developer Gazeley. The property was let to Waitrose Limited on a 30 year lease from practical completion. The price was £114m reflecting a NIY of 4.64%.
Sainsbury’s, Waltham Cross, HertfordshireIn August 2014, Prologis acquired Sainsbury’s Distribution Facility in Waltham Cross from DEKA. The property had an unexpired term of circa 15.75 years. The price was £111.56m, reflecting a NIY of 4.60%.
Kuehne + Nagel Distribution Facility, Derby Commercial Park, DerbyIn April 2014, Knight Frank advised TIAA Henderson Real Estate on the acquisition of Kuehne + Nagel’s Distribution Facility at Derby Commercial Park from Goodman. The property is let to Kuehne + Nagel Drinkflow Logistics with 10 years to expiry. The price was circa £55m.
Morrison’s, Sittingbourne, KentIn June 2014, Tritax acquired Morrison’s regional distribution facility in Sittingbourne, Kent, in a sale and leaseback transaction for a term of 25 years. The price was £98m, reflecting a NIY of 5.19%.
DISTRIBUTION INVESTMENTThe discount between prime and secondary distribution assets reduced during 2014 following significant yield compression in well-positioned secondary markets. We believe this trend will continue in the short term, as oversupplied secondary markets transform into undersupplied markets offering robust occupier fundamentals.
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9
10
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IPD INITIAL YIELD (UK INDUSTRIAL)PRIME DISTRIBUTION (20YR INCOME)PRIME DISTRIBUTION (15YR INCOME)SECONDARY DISTRIBUTION
Q1-Q42008
Q42007
Q1-Q42009
Q1-Q42010
Q1-Q42011
Q1-Q42012
Q1-Q42013
Q1-Q32014
Distribution warehouses – prime yields
NIY TrendPrime 25 year fixed uplifts 4.50% - 4.75%
Prime 15 year income (OM RRs) 5.00% - 5.25%
Prime 10 year income (OM RRs) 5.25% - 5.75%
Prime sub 10 year income 5.75% - 6.25%
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34 6
6
Source: Knight Frank Research
LOGISTICS AND INDUSTRIAL WINTER 2015
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Bilton Way Industrial Estate, LutonIn July 2014, Knight Frank advised TIAA Henderson Real Estate on the acquisition of Bilton Way Industrial Estate, Luton, from Harbert / Canmoor. The property had a WAULT of approximately 5 years. The price was £31.9m, reflecting a NIY of 6.97%.
West Ham Industrial Estate, BasingstokeIn November 2014, CBRE Global Investors acquired West Ham Industrial Estate, Basingstoke from LaSalle Investment Management. The estate had a WAULT of 6.8 years to lease expiries and 6.0 years to breaks. The price was £39.956m, reflecting a NIY of 6.31%.
Clifton Moor Industrial Estate, Clifton Moor Gate, YorkIn May 2014, Legal & General purchased Clifton Moor Industrial Estate, York, from Cornerstone. The property had a WAULT of 11.14 years to lease expiries and 8.53 years to breaks. The price was £41.365m, reflecting a NIY of 5.91%.
The Industrial Collection, LondonIn September 2014, Capital Industrial One acquired a portfolio of 10 multi-let industrial properties located throughout Greater London. The portfolio comprised 170 units let to 136 tenants including Howdens, GE Money and TNT Post. The price was £44.3m, reflecting a NIY of 5.30%.
MULTI-LET INDUSTRIAL INVESTMENT Demand in the multi-let sector is focused on prime and good secondary assets located in the wider South East, with a particular focus on Greater London. However, there are very few buying opportunities for this type of stock. Consequently, in search of higher yield, poorer quality secondary and tertiary estates continue to attract interest from opportunity buyers.
Multi-let industrial yields – prime yields
NIY TrendPrime Greater London estate 4.75% - 5.00%
Prime South East estate 5.00% - 5.50%
Prime regional estate 5.50% - 5.75%
Secondary / tertiary estate 7.25% -8.00+%
34 34 34 34
FIGURE 4
Multi-let industrial yields (%)
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8
9
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IPD INITIAL YIELD (UK INDUSTRIAL)PRIME SOUTH EAST MULTI-LET ESTATEGOOD MODERN REST OF UK ESTATESECONDARY MULTI-LET ESTATES
Q1-Q42008
Q42007
Q1-Q42009
Q1-Q42010
Q1-Q42011
Q1-Q42012
Q1-Q42013
Q1-Q32014
Source: Knight Frank Research
The Orbital PortfolioIn December 2014, Knight Frank advised Orchard Street Investment Management on the acquisition of The Orbital Portfolio from SEGRO. The portfolio comprised six multi-let industrial estates located around the M25 motorway and has a WAULT of c.7.5 years to lease break options. The price was £113.84m, reflecting a NIY of 6.15%.
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UK LOGISTICS DEVELOPMENT PROSPECTS
Aberdeen
£8.75
6.75%
Glasgow
£5.50
6.75%Edinburgh
£6.00
6.50%
Doncaster
£4.75
6.25%Leeds
£5.25
6.25%
Bradford
£5.00
7.00%
Cardiff
£4.50
6.75%
Swansea
£3.00
7.50%
Sheffield
£4.75
6.50%
Manchester
£5.50
5.75%
£5.50
6.75%
Newcastle/Gateshead
£6.25
5.75%
MiltonKeynes
Northampton
£5.75
5.75%
Leicester
£5.50
5.75%Birmingham
£6.00
5.75%
Bristol
£7.25
6.00%
Reading
£8.00
5.75%
Swindon
£6.00
6.00%
NorthLondon
£9.50
5.50%
Crawley
£7.00
6.00%
EastLondon
£12.50
5.25%
£7.50
6.00%
Southampton/Portsmouth
£7.75
5.75%
HemelHempstead
Liverpool
£4.95
6.50%
West London
£13.00
5.00%
Exit yield(%)
Prime rent(per sq ft)
<5%
5-15%
15%+
Developerprofit margin
MarketWith supply tight, we expect speculative development to increase, as occupiers look to source appropriate accommodation and investors seek to move up the risk curve. Rents in the industrial sector are moving into an upward trajectory and this, supported by significant inward yield shift, is helping to support the return of speculative development. So far, prime headline rental growth has largely been focused in the wider South East region, but this is expected to ripple throughout the rest of the UK over the coming two years. Strengthening demand is reflected in rising land values, which have already increased in a number of locations over the past 12 months, particularly in the key markets of the South East and the Midlands regions.
The adjacent map depicts prevailing rents and pricing across the main markets and assesses where is viable for speculative development. The locations deemed viable for speculative development are highlighted in green, reflecting a calculated profit margin in excess of 15% on cost. Those locations shown in red are considered unviable, where predicted profits run below 5%.
LOGISTICS AND INDUSTRIAL WINTER 2015
Methodology – current prospects for speculative development are based on a hypothetical 50,000 sq ft unit which will be let for a ten year term following completion and after any subsequent void period. The viability assessment draws on Knight Frank’s occupational and investment knowledge across our regional office network, taking into account headline rents and net exit yields (post completion), prevailing land values, typical void periods, typical build costs, typical rent free incentives, fees and marketing costs.
© Knight Frank LLP 2015This report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by Knight Frank LLP for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank LLP in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of Knight Frank LLP to the form and content within which it appears. Knight Frank LLP is a limited liability partnership registered in England with registered number OC305934. Our registered office is 55 Baker Street, London, W1U 8AN, where you may look at a list of members’ names.
Knight Frank Research provides strategic advice, consultancy services and forecasting to a wide range of clients worldwide including developers, investors, funding organisations, corporate institutions and the public sector. All our clients recognise the need for expert independent advice customised to their specific needs.
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Central London Quarterly Q3 2014
Shopping Centre Investment Q3 2014
European Quarterly Report Q3 2014
RESEARCH
EUROPEAN QUARTERLYCOMMERCIAL PROPERTY OUTLOOK Q3 2014
OCCUPIER TRENDS INVESTMENT TRENDS MARKET INDICATORS
SHOPPING CENTRES INVESTMENT QUARTERLY Q3 2014
RESEARCH
Outlook• Forecasters continue to be optimistic
on the prospects for the UK economy. The consensus GDP growth rate in September was 3.1% for 2014, which is unchanged on August.
• Retail sales increased by an impressive 3.9% on an annual basis in August, reversing a recent deceleration in the rate of growth in the last few months.
• Given the current level of stock under offer, Knight Frank predicts UK shopping centre investment to reach pre-recession transaction levels in 2014.
• The strong competition for assets has continued to put downward pressure on yields across all segments. Prime regional shopping centre yields fell 50bps to 4.25% over Q3, while good secondary shopping centre yields hardened from 6.75% to 6.50%.
Q3 shopping centres transactions
Shopping centre Status Purchaser Vendor Price (£m) NIY %
Cabot Circus, Bristol (50%) Sold Ginko Tree and Axa Land Securities 267.8 6.30
East Kilbride Sold Orion RBS 171.0 6.75
Project Leopard Sold Edinburgh House / Cerberus Glanmore Property Fund 81.5 8.75 (consists of 6 shopping centres)
Foyleside, Londonderry Sold Kildare Partners RBS Receivership 74.6 7.75
Palace Exchange, Enfield Sold Standard Life RBS Receivership 65.0 5.50
Abbey Centre, Newtownabbey Sold NewRiver Retail and PIMCO RBS Receivership 64.4 8.25
Priory Meadow, Hastings Sold NewRiver Retail and PIMCO RBS Receivership 47.0 6.75
Cameron Toll, Edinburgh Sold Oaktree Capital & Hunter AM Warren Private / Loanstar 46.3 7.00
Source: Knight Frank LLP
0%
2%
4%
6%
8%
10%
Q2-Q42008
Q1-Q42009
Q1-Q42010
Q1-Q42011
Q1-Q42012
Q1-Q42013
Q1-Q32014
PRIME RETAILREGIONAL S/CENTRE
DOMINANT PRIMES/CENTRE
GOOD SECONDARY S/CENTRE
SECONDARY TOWN S/CENTRE
5 YEAR SWAP RATES
8.50
6.50
5.50
4.254.50
1.97
FIGURE 2
Retail & shopping centre equivalent yields Q2 2008 - Q3 2014
Source: Knight Frank LLP
PROPERTY COMPANY
OVERSEAS INVESTOR
FINANCIAL/BANKS
INSTITUTION
FIGURE 1 Who’s buying? Q3 2014
Source: Knight Frank LLP
CENTRAL LONDONQUARTERLY – OFFICES Q3 2014
RESEARCH
TAKE-UP – 45% ABOVE LONG-TERM AVERAGE
SUPPLY – LOWEST LEVEL SINCE 2008
OVERSEAS BUYERS DOMINATE INVESTMENT SALES
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