Feeling the crunch

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Feeling the crunch

The latest research from Lambert Smith Hampton shows that the credit crunch and the ensuing economic downturn is beginning to impact on the UK warehouse market., as the company’s Arezou Said explains.

While we saw steady take up at the larger end of the market during 2008 - with Willis Gambier and Kuehne & Nagel each taking in excess of 500,000 sq ft and Morrisons committing to over 900,000 sq ft - in the wider market take-up was down on 2007. Preliminary data shows take-up in 2008 was around 20% lower than 2007 as the credit crisis and ongoing financial crisis impact on occupier confidence.

Supply increased during last year by approximately 35% compared with 2007, with the main industrial heartlands such as the North West, West Midlands and Yorkshire & Humberside accounting for a significant proportion of the space on the market. However, lack of funding and the spectre of recession and empty rates have led to a fall in new construction starts.

Earlier in 2008, our research into the impact of the abolition of empty rates relief on the property market revealed that increased liability would contribute to a reduction in warehouse construction, an increase in development costs and ultimately further upward pressure upon rental values. In our survey of property professionals in February 2008, 50% said they would be reviewing their property portfolios, selling or demolishing unlet or unsold buildings and slowing their delivery of development schemes. In the event, the introduction of this legislation could not have come at a worse time with business owners already suffering falling demand and increased operating costs, the debate over this poorly timed piece of legislation has continued unabated with industry groups working tirelessly to get the relief reinstated.

In his pre-budget report, Chancellor Alastair Darling announced plans to reintroduce empty property rates relief to commercial property with an rateable value of less than £15,000. This will certainly help owners of very small units; however, it does nothing for warehouse operators with empty property or developers of larger projects and large scale regeneration schemes, nor will it help owners which have chosen to demolish unoccupied property rather than face liability for business rates for it.

Our survey also indicated that the result of the removal of empty rates relief would be lower rental values and more lease flexibility, as developers and landlords attempt to reduce their liabilities by offloading stock. Indeed, the market has seen some evidence of that in recent months with developers, such as Prologis for example, offering much shorter leases on their stock.

With regard to rental values, it is difficult in the current economic climate to attribute any softening in headline rents solely to the impact of empty rates. So far, prime headline rents have largely remained steady for most centres, but there is increasing evidence that rental values are beginning to soften in some locations and landlord inducements and incentives are increasing. The market evidence is supported by the IPD index, which shows industrial rents declining modestly ( -0.2%) since September.

With recession now inevitable and the UK economy expected to contract by around 1.5% this year, the warehouse market along with other property sectors is likely to see a fall in rental values in 2009/10. IPD forecasts show that rents for distribution warehouses will fall by 3.3% in 2009 and by a further 1.3% in 2010. Despite rents falling nationally, warehouse operators in London and the South face increasing property costs as rents in London are expected to grow each year. This reflects the large number of unsatisfied requirements in the region and shortage of required space.

The outlook for the warehouse property market then is for around 18 months of contraction marked by falling take-up and rents alongside rising availability. From 2010 we expect the economy to gradually return to growth with the property market following suit. Speculative development will continue to be discouraged by lower bank finance available and the government’s position on empty rates for the foreseeable future which will in turn reduce supply available for businesses embarking on renewed expansion strategies when the economy recovers.

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