The big gamble

Prices are rocketing for prime industrial land in Birmingham. But experts say developers have little chance of securing viable rental returns. So why are they bidding so aggressively? asks David Quinn Three years ago, the price of an acre of industrial land close to one of the Birmingham M6 junctions was typically around £250,000 per acre. If a developer was to offer that for a site today, it would be met with a fair amount of mirth. Such is the state of the Birmingham industrial market, where bids of £400,000 per acre are common and rumours abound that the £450,000 barrier has been or will soon be breached for prime product. Agents describe the situation as unsustainable. Three sites have become the focus of attention. One is the former Leyland DAF Vans site in the Heartlands industrial zone, close to Bromford Gate, where a figure of £450,000 per acre is being mooted. The former Delta Metals site on Argyle Street in Nechells, close to Spaghetti Junction, is another. Sources say it has gone under offer to Harbour Developments for £475,000 per acre, although DTZ Debenham Tie Leung, which is acting for the vendor, refuses to confirm that this is the case. The final big money site is the 90 acre IMI site in Witton, where Frontier Estates is believed to have bid £450,000 per acre to develop a scheme known as Lion Park. At these prices, shed development begins to look risky. It is estimated that rents of at least £6 per sq ft would be needed to make development viable and yet, in Birmingham, they remain stuck at around £5.75. Tim Matthews, director at Lambert Smith Hampton, believes developers are taking a big risk on any site where they have bid more than £350,000 per acre. “The rents and yields that would have to be achieved on £450,000 per acre are way ahead of the current market. Developers are gambling when the economic conditions show little sign of growth,” he says. Others agree. “The cost of land has gone through the roof, but rents haven’t really kept track,” says Mark Fitzpatrick of CB Hillier Parker. Tim Suffield of Fuller Peiser is more specific. Tapping away at a calculator, he says: “If you appraise off rents at £5.75 per sq ft and yields at 7.5%, then you build in a 12-month void period and take into account the fact that build costs have recently increased to around £33 per sq ft, the maths simply doesn’t stack up.” Like Suffield, many agents are at a loss to explain how developers are able to make these schemes work, and question why they are bidding so aggressively when the occupier market is soft. According to Nick Ford of DTZ, developers are putting aside aspects of the traditional development appraisal process. “Developers and agents can work through appraisals, but the problem is that everyone will do that and everyone will come out the same,” he says. “There’s some kind of ‘x-factor’, where developers are willing to add on a certain percentage to get a site.” Some speculate that developers are attempting to warn off their competitors by placing high bids, before reopening negotiations to get a better deal later. This explains why sites sometimes go under offer two or three times before a deal is finally struck. But Suffield believes it is a dangerous game for developers to play. “You could do it once, but then you get a reputation for ‘chipping’ and it’s likely to threaten your ability to purchase sites in the future,” he warns. Others suggest that, although big bids are being rumoured, there is little evidence that more than £450,000 per acre has been paid. “No deal has been concluded at that kind of figure and it will be interesting to see if anyone pays that once they’ve gone through due diligence, site surveys and so on,” says Martin Guest of Insignia Richard Ellis. Aggressive bids Guest adds that it is mainly developers with their own funding that can place such aggressive bids, while those with external funding find them more difficult to justify. “ProLogis, for example, is effectively a fund as well as a developer. This kind of company is likely to have a different pricing and appraisal strategy when it bids for a site,” says Guest. Other agents believe a shortage of prime sites close to the city is spurring demand. “There’s a finite amount of land. Sites like this simply don’t come up that often,” says Richard Meering of Meering & Co. Jeremy Hoare of Jones Lang LaSalle adds: “Although land values are high, they are cheap when compared to parts of the South East, such as Heathrow.” Whatever the thinking behind big bids, it is clear that in the current market occupiers are spoilt for choice, meaning they are unlikely to pay through the nose in rent for schemes where developers have been stung on the cost of the site. This spells potential problems for the Birmingham shed market. CB Hillier Parker estimates that at least 1m sq ft of new industrial stock is on the market around Birmingham (see table, p110), compared with an average of around half that in previous years. LSH’s Matthews fields a similar estimate. He says: “There is an enormous amount of development that has taken place. It’s unprecedented in the past 20 years.” Nor is rental growth forecast to improve. In the West Midlands as a whole, it has slowed to 3% pa since the start of 2002, compared with 4.6% in the year to December 2001, according to GVA Grimley. The agent’s latest review forecasts that this trend will continue, with rental growth slowing to a snail-like 1% pa in 2003 before recovering from 2004 onwards. GVA Grimley’s David Willmer says this helps explain why developers are placing high bids now. “Although it’s hard to see how some of the appraisals work, with a lot of these sites there will be no building until 2004. Developers seem to be taking the view that rental growth will have increased by then and that the existing stock in the market will have been taken up,” he says. Other agents are less optimistic. They point out that the outlook for sites in and around Birmingham, where higher quoting rents are necessitated by high land prices, does not look rosy and other areas both within and outside of the West Midlands are beginning to look more attractive to occupiers. In the Black Country, for example, the price of land is significantly lower – typically £250,000 per acre – meaning developers can accept lower rents and still make good profits. This perhaps explains why Alfred McAlpine Developments is pressing ahead with a 50,000 sq ft speculative industrial scheme at Brook Point, Wolverhampton, subject to planning permission. Another fillip for the Black Country is the M6 Toll, formerly the Birmingham Northern Relief Road, which is likely to decrease the pressure on the M6 west of Birmingham. Where once developers were safe in the knowledge that occupiers preferred sites in the Golden Triangle south-east of Birmingham, the M6 Toll potentially throws that out of the window. “As long as the tolls are set at the right level, it will persuade occupiers to look at cheaper locations on the western side,” says Matthews. Lichfield, where Evans Property Group is developing the 300-acre speculative Fradley Park, as well as Cannock, are tipped as growth locations because of access to the M6 Toll. Schemes on the M42, which were traditionally more expensive than those closer to Birmingham, could also look more attractive as rents achieve parity in town. IM Properties’ 372-acre Birch Coppice business park at junction 10 of the M42, for example, could therefore benefit. Industrial freeholds Demand for property outstrips supply The cost of renting is driving the freehold market, which is riding on the crest of a wave. Many occupiers have realised that the combination of high rents, low interest rates and the relatively poor performance of the stock market makes the purchase of freehold buildings look sensible in investment terms. However, there is a shortage of freehold industrial and distribution buildings in the West Midlands, which is why a limited number of developers are now speculatively developing new properties to sell to occupiers on a freehold basis. “Some developers are looking to cater for medium-sized businesses in rented buildings which want to buy their own stand-alone product,” says CB Hillier Parker’s Mark Fitzpatrick. Some agents even claim some of the bidders for the famed Delta Metals site have freehold schemes in mind, although this is unconfirmed and others, such as Michael Price of GVA Grimley, suggest the approach is unlikely. “There’s demand for existing good quality freeholds, but developers bidding for larger sites are likely to be looking at big shed leaseholds,” he says. Nonetheless, developments such as HBG’s Rabone Park, Smethwick, and Catesby Property Group’s Catesby Park in Kings Norton are offering speculative buildings on a freehold basis. There is clearly a gap in the market, but still the willingness of developers to offer freeholds is dependent on what’s available nearby, according to agents. “Slough Estates won’t consider freeholds on its Kings Norton Business Park, which means the strength of demand at Catesby Park is likely to be better,” explains Simon Norton of Colliers CRE. Industrial rental growth Rents are forecast to fall before picking up in 2004 Source: GVA Grimley, Barber White Supply of new industrial/distribution units: Greater Birmingham M6-M42 Supply pipeline adds to an estimated 10m sq ft by 2005 Availability (sq ft in 000s if round figure) Scheme Developer Potential size (sq ft ‘000s) Average unit size (sq ft ‘000s) Quoting rent 2002 2003 2004 2005 Comments B8, Hams Hall BP 495 150 225 270 Ability for railhead access. 225,000 sq ft speculative unit due for completion Dec 02 Birch Coppice business park IM Properties 1,650 300 5.50 0 200 200 200 Benefits from railhead into the park. 733,000 sq ft letting to TNT in place Bromford Central, Bromford Lane Astral/Axa 119 25-45 6.00 70 59 Two units under offer at £5.75 per sq ft.nr Further unit of 15,000 sq ft at £6 per sq ft Catesby Park, Kings Norton The Catesby Property Group 165 20 5.75 45 120 Consider freehold sales at £70 per sq ft. Two spec buildings are under offer Expelair Site, Witton Insulated Structures 120 120 5.00 120 Buildings under construction Former Delta Metals site, Argyle Street, Heartlands Not yet selected 160 n/a 6.00 60 90 Site is 10.5 acres. Preferred bidder in place Fort Dunlop, Birmingham ProLogis 120 120 5.75 120 Awaiting prelet Hams Hall Astral/Axa 354 50 5.75 170 184 Four units remaining from 40,000-80,000 sq ft Hams Hall, Plots 2 & 3 Sainsbury’s 409 173.8 235.4 Available on a design and build basis Hurricane Park, Heartlands Spine Road Boultbee /USS 183 50 5.75 47 135.9 Three units available from 47,000-75,000 sq ft Junction 6, Witton IM Properties 117 117 5.25 117 Good interest at present Kingsbury, Tamworth Coltham 500 100 5.75 100 30 acre site Kingsbury, Tamworth Severn Trent 1,000 100 Large scheme likely to be three years away LDV Site, Heartlands Not yet selected 500 100 200 200 Three developers understood to have been shortlisted Lion Park, Witton Frontier (preferred bidder) 1,600 TBC TBC 200 50 Developer not yet appointed Merlin Park 1, Birmingham Scottish Widows 86 86 5.50 86 Existing unit three years old Merlin Park 2, Birmingham Richardson 260 60 6.00 100 160 Units available on a design and build basis Network Park, Duddeston Mill Road, Saltley Easter/Lionbrook 180 20 6.00 + 40 120 20 Sixteen units to let circa 10,000 sq ft. Potential for a further 100,000 sq ft Nexus Point, Witton Wilson Bowden 750 40 5.75 221 72 150 Two spec units built this year. Two further units in 2003 of 30,000 and 35,000 sq ft. Presale of 120,000 sq ft for Corporate Express; 101,000 sq ft under construction for Centresoft. Remaining plot can accommodate up to 150,000 sq ft ProLogis Park, Hams Hall ProLogis 163 163.5 5.50 163.5 Completed in November 2001 Rabone Lane, Smethwick HBG 152 40 5.00 40 112 Will offer freeholds in addition to leaseholds Ringway, A38M Coltham 140 30 5.75 50 90 Speculative build. Completion end of 2003 TRW Unit, Trillennium Point TRW 140 5.75 140 Single building built for TRW was never occupied. Now on market Source: CB Hillier Parker NB Table includes schemes whose total potential size exceeds 85,000 sq ft Industrial supply More than 2m sq ft will hit the market next year Source: CB Hillier Parker