Hot property: How to cash in on the e-commerce boom
Record demand for industrial and distribution space is opening up new opportunities for owners and occupiers. Simon Wood and James Dow outline four ways they can benefit
With over a third of all retail sales now made online, the race is on to find enough distribution space to fulfil demand.
Up and down the country, major 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. Other companies, too, are expanding their space requirements. Supermarkets and other suppliers are increasing stock levels to avoid the disruption to supply chains seen during the pandemic, and in the wake of Brexit some manufacturers are bringing production back to the UK.
With demand outstripping supply, prices have reached record levels. It may be a tough market for those seeking space, but it puts existing owners and occupiers in a strong position. Here are four ways they can benefit:
- Dispose of surplus assets
With prices at record levels, 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?
- 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 sold and leased back distribution centres 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.
- Move to 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?
- 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 businesses 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. Email firstname.lastname@example.org to find out more.
Simon Wood is Director of B8 Real Estate, the North’s leading industrial property agents, while James Dow is founding partner of advisory firm Dow Schofield Watts.
INDUSTRIAL & DISTRIBUTION PROPERTY FACTS
- Take-up of larger units (over 90,000 sq ft) by occupiers in the North West rose by 47% in 2020 to a record 5.2m sq ft.
- Investment in industrial and distribution property in the region rose by 37% to £695m during the same period.
- Typically prices have risen by around 30% in the past five years.