The industrial market could be slowing down - should investors be worried? Credit: Hannes Egler on Unsplash

The Subplot

The Subplot | Sheds cool, Levelling Up trips, Wigan skips


  • Sheds catch a chill: the market cools by a fraction of a degree, but there will be consequences for warehouse development
  • Elevator pitch: your weekly rundown of who is going up, and who is heading the other way

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Why 25bps matters to logistics property

A fraction of a per cent off industrial yields signals a change from hot to less hot in the North West shed scene. This will have consequences.

Like summer turning to autumn, there’s a change in the air. A vibe shift. A new feel. Suddenly the too-hot-to-handle logistics property market is – well, different. Meaning what? Property industry gossip points to Logistics North where Amazon signed for 357,000 sq ft in 2016 in a deal with LondonMetric. Today the unit is discreetly on the market, but buyers are said to be turned off by the scorching yield of 4%. Chatter says the (let’s call it £40m-£45m) sale is now likely to land at 4.25% – a 25bps shift.

Don’t panic

Nobody thinks a 25bps movement is horrific – it feels like the market norm – or alarming. But it is new. Yields had been moving in, not out, for years. A reversal in direction is unsettling. Interest rate rises tend to be related to yield rises – no surprise there – so yields are rising. Meanwhile, American investors, who have been prominent in the North West, are pulling in their horns. Global concerns plus a fear they may have over-built sheds back home are part of the explanation. There are also worries that a cost-of-living squeeze might curb online spending, with inevitable consequences for warehouse property demand.

They are watching

Does this tiny 25bps shift matter in the real world? Big money is still looking at sheds, urban logistics in particular, and the North West in general. British Land head of logistics, Mike Best, says he’s got his eyes on the region because the maths more-or-less works around Manchester in the same way they do around London (in other words, industrial land prices are so high it knocks all other property options off the board). “London is still our priority, but Manchester is clearly the next logical step,” he says. “If we found something we liked, we’d buy it.”

Forming a queue

Occupier demand for warehouses seems to be holding up – just three Grade A units were available as spring turned to summer, with about 800,000 sq ft of supply in big box units over 100,000 sq ft – nowhere near enough to last until year end, according to Colliers data.

And yet it matters

But don’t relax completely. A tiny movement in yields will have consequences – potentially big ones. David Lathwood, chief executive at Pitalia Real Estate, explains: “If you are appraising a new development or investment off a 4% yield then you now need to reappraise it at 4.5% to be safe.” The effect of this will be to make some very expensive land purchases unviable: you simply couldn’t make the maths work, a problem exacerbated by rising construction and steel, concrete costs.

Pricing issues

So the region ends up with a lot of expensive-looking empty industrial sites? There will be those who argue with the “a lot” bit – though with top land prices at £2.3m an acre who knows? What is clear is that landowners have to do some thinking. Lower price expectations, sit and wait for better days, or cut their losses and sell, perhaps to residential developers?

Goodbye, old friends

Andrew Pexton, director at JLL, thinks some developers will be driven out of the shed market, and that land prices will edge back, and he isn’t dismayed by either. “I don’t think we’ve reached the tipping point, yields have probably moved all they will for now, although who knows by September, and if that means the market takes a breath that’s not a bad thing. Land prices may come down, traditional developers with cash – who don’t have to push the yield – will come to the front, and prices will come off the top,” he says.

Fridge door open

A gentle cooling, not a new ice age, is what’s in store. Investor-developers like Mileway and Panattoni are still gung-ho, the latter embarked on plans for 2m sq ft of logistics floorspace at Crewe’s Radway Green in a joint venture with Warehouse REIT. “It’s hard to tell if the yield shift is significant, but the market has been hot so there’s obviously scope for a short period to pass before the market comes to its senses,” says Lathwood. “But the market will still be hot, still not be normal like it was with yields well over 5%, and sheds remains the hottest property sector of all.”


Going up, or going down? This week’s movers

Wigan’s hopes rise behind the sliding doors on the left, levelling up falls behind the sliding doors on the right, as the Lift of Life takes them on their parallel but very different political journeys.

Wigan town centre revival hopes

Further proof that the future of shopping centres lies in the hands of local councils comes from Wigan, a council with a (literally big) problem in the form of the 440,000 sq ft Galleries mall. Demolition has now been approved and contractor BCEGI tasked with swinging the wrecking ball. Wigan Council and partner Cityheart have great plans including homes, a new market, cinema, and a hotel, with completion of the first wave likely in 2024.

It’s been a long journey – the mall spiralled into decline as the economy struggled with recession in 2010-2012, was half empty by 2013, and endured various failed private sector plans including (it sounds amazing now) a massive increase in floorspace. Fortunately the public sector rode to the rescue.

Lambert Smith Hampton data suggests shopping centre redevelopments have a heavy dependence on the various flavours of Levelling Up funding. As inflation and wage rises begin to bite into political focus and resources, councils may struggle to act in the way Wigan Council was able to when it bought the Galleries from Luxembourg-based Colcastor in 2018.

Levelling up

Levelling up was always a slogan looking for a policy. Data published by the Office for National Statistics, and crunched by think-tank IPPR North, suggests it may be even lamer than it sounded. Public spending has risen – the pandemic and inflation saw to that – but it rose faster in the South than the North.

The North West saw public spending (the net total of everything) rise 18% to £122bn between 2019 and 2021. But the English average was 20%, while the South East went up 21% and London by 26%. Remove the Covid spending and the North West received an extra 2%, making it joint worst. London shot up 10% and every other region 3%. Spending per head tells a similar story: up 17% in the North West, against the UK average of 19% and English 20%. Conservative leadership rivals Rishi Sunak and Liz Truss should be invited to comment on this, but don’t hold your breath.

Get in touch with David Thame: | 01544 262127

The Subplot is brought to you in association with Oppidan Life.

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And out of this just how much public cash went to Mcr..We wonder.

By Anon

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