Posted: 22 July 2015
The industrial property sector is now starting to change. During the early years of the recession the speculative accommodation that was built immediately before to some degree was left vacant resulting in a general drop in value as supply outstripped demand. The reverse situation is now starting to emerge as take-up rates increase with only limited stock becoming available.
This recent undersupply is partly derived from the increase in the cost of new build accommodation and lack of available development finance. Build costs have significantly increased over the last c. 5 years. The relative increase in the cost of materials that are now required in order to reach the necessary SBEM calculation and resulting EPC rating are not supported by the capital worth of the end unit. BREEAM compliant buildings create a further cost burden. The legislation change in 2008 in respect of Business Rates has to some degree been corrected with the introduction of Small Business Rates relief and the introduction of an 18 month rates free period effective from the date of practical completion in respect of new build. Consequently developers are now commonly stating that industrial development is now not profitable without the assistance of grant subsidies or a good tenant pre-let secured. ERDF and LEP funding contributions are typically based on 20 - 30% of the Gross Development Value. As a result dated industrial stock is becoming more in demand as it typically provides a more cost effective solution.
Sub 3,000 sq ft industrial units have always been in demand as compared units of 10,000 sq ft plus. Demand over the last 6 months has however increased to include a greater take-up of larger sized accommodation. The available supply is now being absorbed with no obvious significant supply of available stock becoming available in the short to medium term.
Whilst Perhaps the biggest change is not the buildings that are on offer, but the developers behind them. In the past the majority of the development was typically financed by the banks although in the absence of a willingness by the banks to support speculative developments developers now have to be more resourceful. There are now examples of new projects that are being funded by companies and private parties that are seeking to put their own financial reserves to good use despite having only limited development knowledge and experience. Unfortunately construction still lags behind demand and it will be some period before any new developments are complete and ready for occupation. New build values are similar to 2006 levels and Scotts predict further rises of 10 to 20 per cent for new build accommodation in due course, Hull's commercial property market could be set to take off.