Birmingham has seen speculative industrial development over the past two years, but much of it is empty because occupiers want to buy and developers and institutions won’t sell. By Jon Neale
The West Midlands remains the UK’s industrial heartland, despite the prolonged decline of British manufacturing. And, given Birmingham’s location, it is not surprising that the city is popular with distributors.
Yet the flurry of speculative development over the past two years – mainly along the M6 corridor north of the city centre – has not yet been matched by occupier take-up.
Tim Matthews, director at Lambert Smith Hampton, says: “There is more than 1.5m sq ft of available speculative space in the city.”
Agents say that the problem is not purely a lack of demand. Rather, occupiers’ needs are at odds with developers’ expectations.
“Demand for freehold has outstripped the demand for leasehold,” Matthews adds. “That is no surprise. It is cheaper to buy at the moment. And if you are in a disadvantaged area of Birmingham, you don’t pay stamp duty.”
He cites Budget Greeting Cards’ acquisition of 88,000 sq ft at Coltham Developments’ Ringway Business Park for £5.6m as an example of the demand for freeholds. The building will be completed later this year.
Greg Titley, surveyor at DTZ, agrees with Matthews. “There’s a very strong demand for freehold, but very little supply. Prices have increased accordingly. For newer buildings, prime prices are at £60-£65 per sq ft.”
Nevertheless, of the many speculative schemes available, only a handful of landlords are prepared to offer buildings for sale.
At King Sturge, director Carl Durrant estimates that 65% of all enquiries are for freehold. “Many occupiers are saying to developers – that building is to let but we want to buy. But it’s difficult to persuade the funds. Many are creating or maintaining an investment portfolio,” he says.
“We are encouraging our clients to consider selling, such is the weight of cheap money,” adds Durrant. “The low interest rate will persist for years to come, as will the demand for freehold.”
Even occupiers who are prepared to rent properties find that their requirements are different from the terms developers can offer.
Stuart Mair, associate director at Insignia Richard Ellis, says: “A lot of schemes are fund-related and depend on yield and covenant. Funds will only accept a 15-year lease. Anything less than that will come at a premium in terms of rents, which occupiers often cannot afford. But more occupiers are not prepared to take a 15-year lease.”
He explains that the majority of deals in the past few years have been in the distribution sector, where third-party suppliers are on shorter contract lengths.
The area still has a strong automotive sector, and although few companies actually manufacture parts, there are a number of requirements for assembly plants located close to, for example, Rover in Longbridge or Jaguar in Castle Bromwich.
Secondhand buildings
One commentator gives the example of Plastic Omnium, which manufactures elsewhere but requires a sequencing plant near Land Rover in Solihull.
However, its contract was only guaranteed for three years. Eventually, the requirement was satisfied by a 73,000 sq ft sublet at Hams Hall.
Indeed, agents agree that the need for flexibility often forces occupiers to settle for substandard, secondhand buildings where more realistic lease terms are offered.
However, despite such problems, there have been a number of deals over the past few months.
At Nexus Point, 100,000 sq ft was prelet to distributor Centresoft. And at Merlin Park in Erdington, Hayes Distribution has taken 260,000 sq ft on a similar basis.
On the other hand, the slow take up of speculative schemes has effectively curtailed any further development, at least for the time being. This is quite a contrast to the beginning of the year, according to Matthews.
“We looked set for a great year in 2003. There were a number of impressive deals and enquiries were strong. But in mid-March, at the time of the war in Iraq, the market slowed down,” he says.
“I said we would see the £6 per sq ft barrier broken this year. But we will see a consolidation around the £5.50-£5.75 per sq ft level for decent units. There will be a pause in any further growth until the demand for freehold comes down.”
Neil Starkie of FPDSavills agrees. “During the next two or three years rents will stabilise around the £5.50-£5.75 per sq ft mark. The problem of underlying land supply will continue to impact on rents. Right now, there are very few big sites where you could get on and build. The Hub will provide the next opportunity, but it needs services and infrastructure.”
Meanwhile, agents are awaiting the opening of the M6 Toll early next year. Much discussion in the city’s property community has centred on the £11 charge for heavy goods vehicles.
Some believe the road could reduce congestion along the M6 and increase the desirability of distribution and industrial sites to the east and north-east of Birmingham city centre.
The question is whether the cost of the toll will outweigh the savings distributors make as their HGVs and drivers spend less time on the road.
The fate of all that speculative space is tied into two factors – the need for developers and funds to be more flexible and realistic on one hand, and the rather unpredictable effect of the M6 Toll on the other.
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Availability of speculative schemes, June 2003 |
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There is more than 1.5m sq ft of speculative space available – the result of occupiers’ specific needs not being provided for |
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Ref |
Estate |
Developer |
Agent |
Availability (sq ft) |
Quoting (£ per sq ft) |
|
|
1 |
Nexus Point |
Wilson Bowden |
King Sturge/DTZ |
Potential for up to 177,000 |
5.60 lhold/65 fhold |
|
|
2 |
Junction 6 |
IM Properties |
Phoenix Beard/Colliers CRE |
Unit 16, 117,000 |
5.50 |
|
|
3 |
Ringway Business Park |
CDL |
King Sturge/Insignia Richard Ellis |
Unit 1&2, each 25,000 |
5.90 lhold/70 fhold |
|
|
4 |
Network Park |
Easter |
King Sturge/Cosnett Price |
Units 1-16 totalling 181,850 |
5.50-6.00 |
|
|
5 |
Gravelly Industrial Park |
Standard Life |
DTZ/Phoenix Beard |
Units 30-33, 19,880-86,500 |
5.25 |
|
|
6 |
Hurricane Park |
Boultbee Group/USS |
King Sturge/DTZ/GVA Grimley |
3 units 1 totalling 182,150 |
5.75 |
|
|
7 |
Bromford Central |
Astral Developments/ Standard Life Investments |
Fuller Peiser/Meering & Co |
Two units totalling 59,000 |
5.50-5.95 |
|
|
8 |
Merlin Park (existing unit) |
Scottish Widows |
Jones Lang LaSalle/Meering & Co |
86,230 |
5.50 |
|
|
9 |
Dunton Park |
Cembre |
Burley Brown |
Five units totalling 71,460 |
5.00 |
|
|
10 |
Hams Hall |
Astral Developments/Axa |
Knight Frank/Fuller Peiser |
Three units totalling 161,750 |
5.75 |
|
|
10 |
B8, Hams Hall |
ProLogis/BP Pension Fund |
DTZ/Fuller Peiser/CB Hillier Parker |
226,180. Two plots also available providing up to 110,000 and 140,000 |
5.50 |
|
|
10 |
Alpha, Hams Hall |
J Sainsbury Developments |
CWHB/North Rae Sanders |
217,420 sq ft also land for up to 182,430 |
5.50 |
|
|
11 |
Trillenium |
Wrenbridge & Morley |
Fuller Peiser/Meering & Co |
Unit 1, 35,840. Under offer |
c 5.75 |
|
|
12 |
Connect |
Development Securities |
Chesterton/Insignia Richard Ellis |
Unit 2/3, 44,480 |
6.50 |
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Total available space |
1,521,583 |
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Additional active design and build opportunities |
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Ref |
Estate |
Developer |
Agent |
Availability (sq ft) |
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A |
The Hub |
Fropus |
Knight Frank/Fuller Peiser |
Up to 2m |
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B |
Star Gate, Cuckoo Bridge |
A&J Mucklow Group |
King Sturge/LSH |
Up to 85,000 |
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C |
Faraday Point, Hams Hall |
McAleer & Rushe |
DTZ/Knight Frank |
90,000 |
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Source: DTZ |
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