DTZ research shows lack of Grade A accommodation is affecting deals14th November 2012

DTZ has released the findings of its Property Times UK Industrial Q3 2012 report, which covers the market for properties over 50,000 sq ft. The report revealed that take-up of grade A space rose nearly 7% in Q3, the first quarter-on-quarter rise for nearly 18 months. As a result of strong grade A take-up, the availability of prime space eroded and fell nearly 7% to 15m sq ft.

Overall, take-up in the quarter fell 30% to 5.6m sq ft across 44 deals, the lowest level since Q1 2009, reflecting occupiers’ preference for the best buildings. Total availability rose 1.3% to 142m sq ft, the first quarter-on-quarter rise in nearly two years, as a number of secondary units came to the market across the UK.

The report found that many occupiers have turned their attentions to freehold and leasehold build-to-suit deals in order to satisfy their requirements due to a lack of suitable grade A stock. As a result, bespoke take-up rose 54% to 1.2m sq ft, accounting for 22% of total take-up.

DTZ Research also found that the profile of occupiers had changed considerably from Q3 2011, with retail demand falling from 51% to 10% whilst demand from manufacturing increased by 41%. However, the reduction in take-up by retailers is expected to bounce back over the forthcoming quarters.

Regional proportions of grade A space remain at historically low levels, with over half the regions grade A space constituting less than 10% of total availability. The North West and North East retained their status as the regions with the lowest amount of available grade A space.

Rob Ladd, Director, Industrial agency at DTZ in Cardiff said: “The increase in take-up of Grade A space is very welcome, but it also highlights the ever diminishing supply of available space in that category, hence the substantial increase in activity in the build to suit market. The increase in supply of secondary space will provide opportunities for some, but the lack of good quality space will be driving upwards pressure on rents and downward pressure on incentives.”

Take-up in Wales reached 263,000 sq ft across two deals despite enquiries falling 40%. Ferryman Haulage bought 180,000 sq ft at Newbridge Road Industrial Estate, Caerphilly for £1.425m. The other deal involved Jojo Maman Bebe signing for 83,000 sq ft at Reevesland Industrial Estate, Newport. Total availability currently stands at 10.5m sq ft which will be boosted by 150,000 sq ft of good quality space at Treforest following the BBC’s relocation to Cardiff Bay and 300,000 sq ft in Swansea following the closure of the Alberto Culver plant.

Rob Ladd said: “The market for smaller industrial properties in Wales remains reasonably active especially for better quality space. However the lack of large Grade A accommodation is affecting the number of deals done at the larger end of the scale. Take-up of buildings over 50,000 sq ft was limited to two deals in the last quarter totalling 263,000 sq ft. Ferryman Haulage bought 180,000 sq ft at Newbridge Road Industrial Estate, Caerphilly for £1.425 million. The other deal involved Jojo Maman Bebe signing for 83,000 sq ft at Reevesland Industrial Estate, Newport. Their previous 50,000 sq ft property in Newport is already under offer to Wales and West.

“While total availability is 10.5 million sq ft there is a serious lack of Grade A accommodation and we are already witnessing a reduction in landlord’s incentives and hardening of terms in favour of the landlord for better quality stock.

“Construction has started on the new waste to energy plant in Cardiff Bay. The site will be operated by Viridor on a ten acre former industrial site and will cost over £190m to construct. Given the effect of other major development projects in recent years in Cardiff such as St Davids 2 and Capital Retail Park, it is expected that this scheme will have a positive effect in the region.”

UK industrial investment volumes also fell in Q3 2012 to £435m across 38 transactions which is nearly 50% below average and the lowest volume for two and a half years.

Ben Burston, Head of UK Research at DTZ said: “The industrial investment market is polarised, with very strong demand for multi-let grade A product and well-let warehousing with lengthy unexpired lease terms. Demand for secondary product, on the other hand, is subdued given widespread caution over the occupational market. The scarcity of stock meeting investors preferred criteria is impacting on overall investment volumes.”