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Why London warehouse rent keeps going up

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London and South East warehouse rents are the most expensive in the world. Will they continue to grow, and what happens if they do? David Thame reports.

London warehouses are seriously pricey. New data from Cushman & Wakefield shows London topping a list of 250 logistics locations worldwide. London is not just at the top of the list, but miles ahead of even its nearest competitors.

Of course, living on a smallish island means that the land needed for big box warehouse development is scarce. All UK warehouse pricing is high by global standards. The result is that Northampton and Bristol are more expensive warehouse locations than Beijing, Boston and Barcelona. But there is no escaping London’s super-pricey status.

According to Cushman & Wakefield London’s leading price-point is £17.60 a sq ft a year, ahead of both Hong Kong and the San Francisco Peninsula which occupy second and third place, priced at £14 and £13 retrospectively. Other expensive European cities are Geneva (£13), Oslo (£10) and Zurich (£9.90), all surrounded by mountains so large flat sites are scarce.

These astonishing numbers raise two questions about the logistics market in London and the South East. First, will the region’s warehouses get even more expensive? Second, what happens to occupiers who can’t, or won’t, pay sky-high rents?

The first question is the easiest to answer and it goes like this: the exponential growth of e-commerce has been massively exciting for the world’s ultra-high net worth individuals and the private equity funds that channel their wealth. They think buying intp the logistics property sector can generate much higher returns than most other places they could put their money, most of which pay almost nothing and some of which, like government debt, actually costs them (via effective reverse interest rates).

If huge volumes of money chase the chance to buy into a limited menu of sites and development opportunities in London and the South East then the inevitable result is rising land prices. If land prices rise then developers have to push up the rents they charge for warehouses built on that super-expensive land. It’s not rocket science.

Claire Williams, Research Associate at Knight Frank, explains the problem. “In West London we’re seeing land prices of £10m an acre. That compares with £6m an acre a few years ago, so that’s really strong growth.”

“You get the same movement elsewhere in the South East. In Reading, for instance, land prices today are £2.5m an acre, and they might have been £1m in 2018/19. That is massive inflation in land prices, and it comes at the same time as construction costs have been going up. The cost of fabrication steel has gone up 18% in the last year alone, and some manufacturers have stopped taking orders. Labour costs have also gone up.”

Faced with rising costs, developers have had no choice by to push rents up.

Knight Frank’s projections suggest this kind of pressure will continue, with the result that rents continue to move up steeply.

“Our forecast for land is 3.3% increase in London rents, annually, for the next five years. That is speeding up from the 2.6% we see now,” says Williams.

Whilst 3.3% doesn’t sound like a big number, if you compound it over five years it adds up to a 17% increase on today’s rents. If demand for occupiers grows faster, and the supply of warehouse floorspace does not keep pace, the rise could be much higher.

Rents in the South East are predicted to rise a 3% a year for five years, which comes out roughly the same.

It may surprise you to learn that the investors helping to fuel this growth in rents, and who stand to benefit from it, are not entirely comfortable. The more thoughtful among them wonder if rents are rising faster than the notoriously low-margin logistics sector can cope with.

Rob Trevor is a senior director at CBRE Global Investors. The business has £90bn assets under management, and an increasingly large share of that has gone into buying warehousing.

“It’s clear that the weight of money going into logistics property is translated into land prices and that in turn is driving rents up,” says Trevor.

“I’m conscious of the affordability point, particularly for smaller and medium-sized logistics businesses, and that is because CBRE Investors owns a lot of the multi-let industrial sites they tend to occupy.”

“There is a concern over affordability in the future,” Trevor concedes, pointing to early-stage ideas that could lead to more sq ft of warehousing on every acre, and thus less pressure on rents caused by rising land prices. Intensification of development could mean multi-storey developments of a kind now being explored.

Multi-storey development in locations like GLP’s 426,000 sq ft plans for Peruvian Wharf, Silverton, in London’s Docklands, could prove to be trend-settings. By intensifying land use, they could be slowing the cycle of ever-rising warehouse rents. Unhappily for GLP, the scheme hit planning issues thanks to design problems, suggesting that progress of multi-storey warehousing might not be smooth. If this is the magic bullet, it is a slow-moving one.

Experiments in underground warehousing, and with clever combinations of urban logistics space and student housing, might also help intensify the amount of warehousing that each acre of London land can support. However, these too are not likely to make a massive difference any time soon.

Unless and until intensified development makes sense, what choice do hard-pressed occupiers have? Do they simply have to pay ever-rising rents, absorb the costs, chisel their margins, and hope for sunnier days in the future? Or could they move to cheaper locations elsewhere?

This is where the debate gets interesting because many occupiers are choosing to do just that: go somewhere cheaper.

Rob Trevor explains: “We’re seeing developers reacting by pushing out down the motorway corridors in Kent, or up the M1 motorway, or east to hot spots like Ipswich or up the M40 to Banbury.”

Trevor and his team are heading that way too, attracted to invest in the regional towns by the prospect of well-connected centres of population with plenty of new housing planned. Locations like Southampton, with its port and motorway links, and the Medway towns, with their labour force, are receiving particular attention.

Surveyors CBRE – same name, different business – have been tracking the way warehouse demand is spreading out from high-priced London to slightly less high-priced South Eastern towns.

“We’ve been seeing logistics operators move out of London to secondary locations, but the secondary locations aren’t secondary anymore. They are just slightly cheaper, says CBRE director Richard Seton-Clements.

This movement has seen new deals and developments roll into locations like Aylesford and Dartford. Inevitably rents have risen. Dartford rents have risen from £8 a sq ft for a 50,000 sq ft mid-box unit to something closer to £13. In Aylesford the movement has been from £7.25 to nudging £10 a sq ft.

“What is interesting is that the people now paying £13 in Dartford were paying £6 a sq ft for locations inside the M25 a decade ago,” says Seton-Clements.

His point is that everybody has endured rising rents, but that by moving outside the London orbital some occupiers have attempted to mitigate the rise in their property costs.

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Occupiers moving outside London may also have bought themselves a second advantage: access to the labour they need.

CBRE colleague Jonathan Priestley, a specialist in advising logistics occupiers, explains: “If you are a logistics business looking for 2,000 new staff then you will be competing with a lot of other businesses in the labour market. It may be the case that a location that might not be the first choice can work well for recruiting and retaining staff. If, for instance, your warehouse is not delivering direct to high streets, then a location like that can work.”

The Medway towns have certainly benefited from this kind of thinking. Five years ago it is doubtful major occupiers would consider the north Kent coast. Today Amazon, Wincanton and others are all benefiting from locations which are marginally cheaper than the capital with the big advantage of a labour force and land. If you want a big box, and you want it staffed, locations like these are the obvious solution.

But don’t get carried away. Moving outside the super-expensive London market is not the solution for everyone. Many businesses simply have to be close to the capital, whatever the cost. Even potentially footloose occupiers have constraints.

Luke Tillson is head of agent at Milton Keynes-based consultancy Kirkby Diamond. MK is cheaper than most of the South East, well connected, and has plenty of land. If there was a huge appetite to look outside the expensive London market, then Milton Keynes would be the place to look. But according to Tillson, it’s not happening.

“Most warehouse occupiers, particularly if you are looking at 100,000 sq ft units or more, are not particularly sensitive to local market conditions. They are national firms, and yes MK looks like good value compared to some other places, but that isn’t really driving their decisions,” he says.

Top rents in the town have risen from around £7.75 a sq ft in 2019 to around £9 a sq ft today. Tillson is not concerned. “We were historically undervalued, so there has been some catci9ng up going on,” he says.

All of which brings us back to the start and the question: Will London and South East rents continue to rise? Or is there a ceiling on rents because logistics operators cannot or will not pay above a certain price?

Cushman & Wakefield industrial market researcher Bruno Berretta says that for those who simply have to be in high-priced London, the answers seem to be yes and no, respectively. Yes rents will continue to rise for some time yet, and No, there is no ceiling. “For smaller units, 5,000 sq ft, the grocery and food operators are already paying rents in the mid £30s a sq ft, and there was a one-off case of a rent approaching £70 a sq ft. I guess at some point there will be occupiers for whom rising rents don’t make sense, and they will relocate,” he says, suggesting that for everyone else there is no option but to stay put.

The escape valve may turn out to be a return to high street shops, he hints. The logic here is that e-commerce only worked so long as selling goods from a warehouse was cheaper than selling them from a shop. If warehouses get very expensive, and shops get very cheap – and both of these things seem to be happening – there will eventually be a cross-over point at which selling from shops makes more sense than selling online.

You can imagine how this works: discount pricing in shops attracts customers who now see online sellers as convenient but expensive.

For now that is just speculation. It may never happen. But the fact that it can enter the heads of serious people shows that pricing in the London and South East warehouse market is becoming a serious issue. How much higher rents can go, and with what consequences, remains to be seen.

Table A1: Top 10 most and least expensive global rental rankings, Q4 2020

Most Expensive

 

 

Least Expensive

 

Rank

Country

Market

USD

 

Rank

Country

Market

USD

 

 

 

SF/yr

 

 

 

 

SF/yr

1

UK

London

$ 24.90

 

1

India

Hyderabad

$2.45

2

China

Hong Kong

$ 19.93

 

2

India

Ahmedabad

$2.61

3

U.S.

San Francisco Peninsula, CA

$ 18.25

 

3

Turkey

Izmir

$2.79

4

Switzerland

Geneva

$ 17.97

 

4

Turkey

Ankara

$3.07

5

Singapore

Singapore

$ 16.68

 

5

India

NCR

$3.27

6

Japan

Tokyo

$ 14.71

 

6

India

Chennai

$3.41

7

Norway

Oslo

$ 14.68

 

7

U.S.

Memphis, TN

$3.61

8

U.S.

San Francisco North Bay, CA

$ 14.62

 

8

India

Kolkata

$3.70

9

U.S.

Puget Sound - Eastside

$ 14.31

 

9

Greece

Thessaloniki

$3.72

10

Switzerland

Zurich

$ 13.97

 

10

U.S.

Columbus, OH

$3.95

 

Source: Cushman & Wakefield

 

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