As online shopping accounts for an ever greater proportion of retail sales – reaching a record 36.4% in January this year – the race is on to find sufficient distribution space to fulfil demand.
Up and down the country, big operators like Amazon and The Hut are constructing vast new warehouses while delivery firms are creating networks of smaller sites to ensure they have every town and city covered. Meanwhile in the wake of Brexit and the disruption to supply chains seen during the pandemic, supermarkets and other suppliers are increasing stock levels and some manufacturers are bringing production back to the UK.
Not surprisingly, demand for industrial and warehouse space has soared. Investors too are keen to get in on the act, especially given the problems in the retail and office markets.
As demand outstrips supply, prices have reached previously unseen levels. While it is a tough market for those seeking space, manufacturers which own their own property – or even those leasing space - are in a strong position. Here are four ways they can benefit from the boom:
1. Dispose of surplus assets
Typically, industrial and distribution property prices have risen by around 30% in the past five years so now is a good time to take stock of your requirements. Do you really need all the space you have? Would it be more efficient to subcontract warehousing and distribution? Could trucks staying overnight use a lorry park instead? Could you rent out or sell any surplus space?
2. Sale and leaseback
For owner-occupiers which want to stay in the same property, sale and leaseback offers the best of both worlds. You can negotiate the lease to suit the needs of the company, while releasing capital that would otherwise have been tied up in real estate to use for your core operations, to make strategic investments or pay down debt.
Over €8bn of such deals were completed in Europe last year in the logistics sector alone.
Sports Direct, Tesco, Sainsbury, Next, DHL, Travis Perkins, Topps Tiles, Neovia Logistics have all agreed sale and leaseback deals over the past 18 months and Asda’s new owners, Mohsin and Zuber Issa and the private equity firm TDR Capital, are planning to do the same to help finance their acquisition. There are many examples of smaller companies using sale and leaseback too.
Expect to pay around 4-5% of the sale price in future rent. Bear in mind that the terms of the lease can have a big impact on the property value, so for example, by signing up for a longer period, you could achieve a better price but are obviously tied in for longer.
3. Find a more efficient space
Higher property prices make it all the more important to ensure the space is used to best effect and here building design and layout are key. A higher, modern layout could reduce your footprint and increase your efficiencies - for example, moving from an existing dated building with 6m eaves to one with 12m plus eaves could almost double capacity. Always keep an eye on running costs and consider if it truly is the best location. Could you reduce rent, cut fuel costs or gain access to a wider labour pool by moving elsewhere?
4. Renegotiate terms with the landlord
A shorter lease can reduce the value of a building by 15 – 20%, so if it only has a few years to run and you are planning to stay for the long term, speak to the landlord. By signing up for a longer period, tenants can often negotiate significant benefits – in some cases, sums of over £1m for larger properties.
The current property market offers a golden opportunity for manufacturers navigating the post-pandemic landscape. If you are an owner or occupier looking to raise funds or assess your options, it pays to seek advice from a property or finance professional.
Simon Wood is Director of B8 Real Estate, a leading industrial property agent, while James Dow is founding partner of advisory firm Dow Schofield Watts.
