Keep On Trucking: Still Lots Of Mileage In The Midlands Logistic Sector

Late-cycle concerns and Brexit uncertainties have multiplied the risks in the Midlands logistics property sector. Meanwhile continuing chaos on the high street — this week Homebase announced a CVA — mean disruption further up the supply chain in the warehouse world. 

So is now the time for developers to take their foot off the gas? Certainly not, according to IM Properties, as they announce a 532K SF Midlands speculative scheme.

Calling the top of the market is one of the trickiest tasks in property, and one almost everybody gets wrong. In the high-speed logistics sector the task is even harder because forces seem to be pulling in opposite directions. There is an ever-lengthening list of high street retailers facing financial problems or entering CVAs. (Company Voluntary Arrangements, or CVAs, allow distressed business to negotiate rental reductions with landlords.)

This week Homebase, the DIY chain, Office Outlet and the latest of several troubled burger chains joined House of Fraser in the emergency room. The consequences further up the supply chain can be profound, as the dispute between operator XPO and House of Fraser over the operation of their Wellingborough and Milton Keynes warehouses demonstrates. Behind the obvious woes of the high street are wider anxieties about sterling, interest rates and rising inflation.

Yet step back from the high street and the logistics sector looks rocket-fuelled. Nationally, a new record rent has been set at £30/SF, a sign of West London's shortage of industrial sites. Closer to home in the East Midlands, take-up reached 4M SF in the first half of 2018, very nearly equal to the region's entire take-up in 2017. Savills' latest Big Shed Briefing shows take-up 146% higher than the long-term first-half average. So hot is the market that the owners of the 250-acre Rockingham motorsport and speedway track have decided to end racing on the site, and transform it into a logistics hub.

So when Solihull-based IM Properties announced they will begin speculative construction of a 532K SF warehouse at Hinckley Park, Leicestershire, is the company taking a massive gamble ahead of a choppy autumn and a distinctly uncertain 2019?

Late Cycle But Not Too Late

With Brexit rumbling, and the retail scene more uncertain than ever, is now really the time for a £70M logistics property investment?

“Is it late cycle? Well it is certainly not early cycle. That said people have been talking about late cycle for the last two years, and we have heard that and so we went back to basics for the Hinkley site,” IM Properties Development Director Richard Lawrence told Bisnow.

Investment in infrastructure and site preparation valued at around £25M in the site has created a product which IM thinks will defy almost any fluctuations on the margins of the logistics sector.

“This decision will pay dividends even if the economic cycle were to turn against us, because the way we shop in the U.K. is continuing to change, and even uncertainties like Brexit could count for us because Brexit might mean you need more U.K. distribution floorspace,” Lawrence said.

IM Properties are not yet quoting rents but the local tone is around £6.50/SF for units of this kind, and the company will be hoping to match or better that.

“We look at an East Midlands market where the stock levels of speculative floorspace are way lower than normal levels. It’s a healthy market, and we think occupiers will make common sense decisions on the strength of what they see — and this unit will be the best of the best," Lawrence said.

More Roads To Travel

The Hinkley development comes as two further developments totalling around 300K SF reach completion, and as preparatory work continues on the 400K SF IM Properties has pledged to build speculatively at Birmingham’s Peddimore site. It all adds up to a substantial gamble on the continued good health of the logistics sector.

Not only is IM Properties developing, but others are racing ahead with plans of their own for additional Midlands logistics space. The 713-acre Four Ashes site at Cannock is among the largest, with nearly 8M SF of floorspace proposed on either side of a branch of the West Coast Main Line, bounded by the A449 to the west and the A5 to the north where it meets the M6 at junction 12.

Is the development pressure pushing up land prices? Lawrence refuses to put a figure on the increase — or to estimate current prices — insisting that too often land price data is incomplete and unreliable. However, he believes there have been significant increases in the last 12 months, and expects further increases to come.

“I’m not sure I’d say the party is far from over for the logistics sector — I’m not sure it is a party — but there is still a great deal of activity and there will continue to be activity, regardless of the economic cycle because investors are still enthusiastic about warehousing,” Lawrence said.