The Subplot
The Subplot | Big money can’t get enough of big sheds
THIS WEEK
- Big sheds, big money. The warehouse sector is more appealing than ever to those with seriously deep pockets
- Elevator pitch: your weekly rundown of what is going up, and what is heading the other way
BIG SHEDS, BIG MONEY
Serious money hasn’t lost interest in warehousing
You thought shed investment had peaked? Think again. But big money’s grip on the sector has tightened.
It’s a moment when Nick Leslau joins the board of any property business. Well-known in Manchester, and one of the big beasts of real estate, over the last three decades Leslau has successfully called the top of markets, and the bottom of markets, and is a member of the Bank of England Property Forum. As of this month Leslau is on the board of LondonMetric Property, after its merger with LXi, creating a £6.2bn real estate investment trust.
Different strokes
That Leslau’s up for a big sheds is a big sign the market hasn’t yet topped. The REIT’s listing on the main market of the London Stock Exchange comes as Tritax also turns in strong results. Between them – investor, and investor-developer – they show how far big money is making big returns from big sheds.
Rethink
The warehouse sector has looked a bit bumpy to some investment analysts who, for instance, point out that the volume of pre-lets is sharply down on the peak (Subplot, 25 January) but at the top end where these businesses dwell, it’s still as beefy as ever. It just requires a bit of flexibility, meaning some fancy footwork in the (still oversubscribed) big box sector, and some reallocation of assets into small and mid-box units where the new business is said (by CBRE, among others) to be found.
Clever deals
Creative deal-making helps in a big box market which isn’t as hot on pre-lets. LondonMetric bought a 213,000 sq ft, five-unit Crewe warehouse scheme for £13m, with vendor Marshall CDP helping to smooth income for the new owners by taking a three-year lease at a rent of £1.5m a year, a net initial yield of 11%. If and when a new tenant turns up, LondonMetric will pay CDP an overage payment based on a fixed percentage of the difference between the initial purchase price and open market value. The current expectation is a market rent of £1.8m, taking the yield down to 8%.
Buy and sell
Chief executive Andrew Jones says the firm will reposition the portfolio, which in this instance means more of better. At the same time as buying in Crewe, the firm offloaded a 39,000 sq ft B&Q retail warehouse in Burnley, no doubt thinking yields in retail warehousing have moved in the wrong direction faster than those for sheds, which begin to stabilise. LondonMetric isn’t doing badly: recent deals in the North reveal the direction and the tempo. The £21m purchase of a 260,000 sq ft Next warehouse in Doncaster, at a net initial yield of 7.1% is balanced against the sale of 58,000 sq ft of retail warehousing let to The Range and Lidl in Durham. The firm will announce its full-year results for the year ending 31 March on 4 June.
The only way is up
Good news, too, from Tritax Big Box Reit, which presides over a £5bn shed portfolio, and which has just reported a rise in rental income. Like-for-like rental value is up 6.9%. Passing rent is up from £205m in 2022 to £217m in 2023, which isn’t bad when achieved in the midst of a plunge in lettings, down from 38m sq ft in 2022 to 22.1m sq ft in 2023. The vacancy rate is 2.5%, a shade up on last year and a shade below LondonMetric.
Trade up
Like LondonMetric, the tactic is to trade away what’s not wanted, with £327m sold at or above book value, with the proceeds recycled into greener real estate and urban logistics.
Tritax, via Tritax Symmetry, also builds. This element of the business let 2.2m sq ft, earning £13.6m in passing rent, and started construction on another 1.7m sq ft, which will add £15.6m to the rental pot. Recent deals include 134,000 sq ft in Doncaster let to dog food business Butternut Box. The North West’s own Andrew Dickman became chief executive of Tritax Symmetry in January.
Low loan-to-value ratios, longish unexpired leases, rising passing rents, and portfolio valuations that have held their own when all about has crumbled: it’s far too soon to declare the big shed market has peaked. But the best bits are now in the hands of big money, which was always how the story would end.
ELEVATOR PITCH
Going up, going down. This week’s movers
A new VIP fast-track for planning applications is road-tested, while the government agrees a novel way to co-ordinate regeneration in Leeds. Doors closing.
VIP lane for planning applications
Consultation has begun on plans for an accelerated 10-week planning service for some commercial developments. The proposals aim to speed up a process which means only one in five significant commercial applications gets decided within 13 weeks, and most take about 28 weeks. The idea is you pay a premium and it all gets done a lot quicker. If they fail to hit the target you get your money back.
The devil is always in the detail, and the detail here makes some wonder if it’s going to be much use. The offer will (probably) be open to schemes of 10,000 sq ft or more of the kind that get screened as requiring an Environmental Impact Assessment. Anything that touches the Habitats Regulations, or listed buildings, ancient monuments, World Heritage sites, or is for retrospective development, gets knocked out and won’t be able to use the new process.
Those that survive this winnowing will, quite simply, get a place in the queue ahead of everyone else. “There would be no loss in scrutiny or special consideration for these applications… The key aim is to ensure that these applications are prioritised through the local planning authority’s own internal processes faster.“ Basically, local councils just have to improve their systems and move faster to accommodate a VIP fast lane.
The document then undercuts the whole logic of the proposal by stating: “Research and engagement with the sector over the last decade has continually highlighted the most common causes for delay with these types of major development applications are a) inadequate or missing information requirements and b) the time taken to agree and finalise any section 106 agreements.” So in order to make it work, applicants need to ask for, and listen to, pre-application advice (which costs, and which isn’t included in the money-back guarantee), and to talk to statutory consultees in advance. If they did this routinely, why would you need to pay extra for an accelerated service?
Leeds leads the way
The government had added the weight of its goodwill to plans to spread the economic success of Leeds city centre to the wider hinterland. Last week’s Budget included a Michael Gove-endorsed vision for the city. Much of the document reiterates what the government is already doing, like trams and the investment zone. The new element is a Leeds Transformational Regeneration Partnership, equipped with £2.7m to help with the big projects and the delivery of the vision, not least in the six neighbourhoods immediately clustered around City station.
“We want to see a coherent placemaking vision across the whole of Leeds, rather than the unsatisfactory unfurling of piecemeal development and individual projects,” said Gove, city region Mayor Tracy Brabin and the city council. “The Leeds Transformational Regeneration Partnership between national, regional and local government – offering a clear trajectory for change, investment and collaboration, and creating welcome certainty for both the public and private sector.”
This is the usual clotted language of regeneration, but it bodes well if the partnership delivers on its aim of addressing fragmented land ownership and infrastructure barriers, helps prepare sites for development, raise land values, tackle marginally viable sites, and provide more commercial floorspace. The partnership also promises to provide a single front door for public funding, financing, and site-enabling discussions. It might make a light-touch model other city regions will adopt.
