Landlords of prime industrial and distribution property across the Midlands are finally lowering their white flags for the first time in more than six years.
Paul Rixon, who heads the landlord and tenant and asset management team at Birmingham-based property investment consultancy MK2 Real Estate, said increased occupier demand for scarce prime industrial and distribution space means the upper hand in rent review and lease renewal negotiations is now shifting back to landlords.
He said: “Demand in the sector is high, but stock levels are low and in some size brackets and locations non-existent. The price of building new sheds has also gone up. These factors have already put the squeeze on incentives and we are now starting to see both rents and lease lengths moving north as well. Flexibility once again has a price tag attached to it.”
Mr Rixon predicts that headline rents will hit £6.25 per sq ft before the year is out.
He added: “With IM Properties achieving £6.15 per sq ft on a 150.000 sq ft speculative unit at Birch Coppice, a £6.25 per sq ft deal is now looking increasingly inevitable. The region’s buoyant automotive sector is driving demand, and we are starting to see a scramble for the best space.”
According to Mr Rixon, incumbent tenants looking to extend or re-gear their leases are now at the eleventh hour.
MK2 recently advised Pilkington Automotive on a re-gear of the lease on its 250,000 sq ft distribution warehouse in Redditch.
The car windscreen manufacturer was 15 years into a 20-year lease, and has agreed to remain in occupation for an additional ten years.
“We managed to secure £1.7million in savings for Pilkington, and a rental discount on some unrequired expansion land. The deal demonstrated that tenants and their advisers need to be more creative and there has to be a clear upside for the landlord,” said Mr Rixon.
However, even blue-chip occupiers are now drinking at the last chance saloon.
Mr Rixon recently represented Ignis Asset Management in their rent review negotiations against Asda on their 300,000 sq ft George clothing distribution unit at Brackmills Industrial Estate, Northampton, on which there was 15 years left to run.
Despite Asda arguing that rents had not increased, an independent expert ruled that they had and awarded an uplift that increased the landlord’s investment value by more than £500,000.
Mr Rixon said: “Tenants have got used to landlords walking into negotiations with the white flag raised. Now, the flags are not even at half-mast. Occupiers expecting landlords to roll over will be disappointed: the boot is now on the other foot.”
Mr Rixon recently provided asset management advice on two MK2 industrial investment acquisitions: CCLA’s £20million purchase of Peugeot’s 618,442 sq ft distribution facility in Coventry and the acquisition of 220,774 sq ft across three units for a private charitable trust at Redfern Industrial Park, Tyseley.
“Although there were leases of between seven and 14 years remaining on these properties, the potential to secure an uplift in the rents was key to the deals. Investors are no longer prepared to settle for capital increases: they expect income growth as well,” he said.