Philip Colman, Divisional Partner in the Glenny Investment team, speaking to Property Week about why development opportunities still provide an attractive route into London industrials. Despite Greater London industrial deals reaching a record high of over £1bn in 2017, investor appetite appears to have remained unabated during the early stages of 2018. Unsurprisingly, the various built opportunities being marketed continue to see strong interest schedules and will likely close within competitive bidding processes. However, these high volumes have not been driven up by a large number of sellers, but instead by a huge inflow of equity into the industrial sector, particularly within London. As a result, Greater London industrial developments have now become the cornerstone of a balanced investment portfolio and while, on the surface, the numbers of investors willing to fund development opportunities within the region appear to be decreasing, significant development opportunities do still exist. The biggest factor encouraging industrial development is the land-grabbing process from the various other needs within London. While the GLA announced aims to protect employment land and use innovative design approaches to assist density maximisation on residential schemes, the never-ending influx of new inhabitants into the capital means more and more land is slipping away from industrial use. Consequently, those parties who are actively funding developments are acquiring ‘best in class’ assets, with most specifications being future-proofed, limiting capital expenditure for the medium to long term. This scenario sits in contrast to those investors acquiring built assets, many of which are beginning to show signs of aging and will require expenditure at lease expiries. More recently, with the lack of supply in the Greater London region, landlords have been able to delay redevelopment and recycle their assets, thanks to the limited rental discount between primary and secondary stock. However, this approach only has a limited shelf life. Build times on developments are now so fast that the assets can become income producing in relatively short time periods, leading existing landlords to questioning whether to ‘stick or twist’ on a redevelopment. In addition, demand within London remains strong within the 5,000 to 20,000 sq ft sector, given the distinct lack of good quality stock available. The result is increased demand from a combination of SMEs and last mile delivery businesses working to secure future-proofed premises in the current stock-starved market. A recent internal review of our core occupational markets indicated strong levels of enquiries from SME’s looking to occupy this size bracket. Although SME’s traditionally provide a lesser covenant to the investor, these occupiers are becoming an increasingly important, especially as the traditional trade counter operators appear to be slowing their growth plans. So, with the above factors supporting development and continuing downward yield compression for upstanding opportunities, there is evidence to suggest development on smaller sites with a Gross Development Value (GDV) of £15 m or lower will continue to be an attractive entry point for investors into the London industrial sector.
London sheds still appeal
By Robert McAllister