Copyright: David Lawson - Property Week 2002
Uproar erupted recently when it was revealed that banks were restricting home loans for parts of London where prices might fall. People have short memories. Redlining was once the norm for lenders, and not just for housing. Almost anywhere east of Tower Bridge was considered an investment wasteland.
Then came Canary Wharf, Lakeside and Bluewater, the Royals and the Channel Tunnel link. Enough light is breaking from the east to justify the cliché of a new dawn for a change. But only now are developers getting their teeth into less spectacular schemes.
For years they have threatened to emigrate from the ‘overpriced’ west, with its bloody-minded planners and grasping landowners. But there was one small problem: tenants and investors showed little interest in moving. Speculative development seemed pointless even at bargain prices when tenants were fighting to pay twice the rents to remain out west.
But a combination of improved accessibility and price pressures has finally forced them to look further afield. ‘They might not start looking at Dagenham. In fact, they still might start at Heathrow and work around the M25 but increasingly end up around the east,’ says Guy Frampton of CB Hillier Parker.
Retailers like Tesco and Sainsbury have other reasons for big new depots on this side of the capital. Every pound spent on rents counts much more in the bloody price wars raging through the industry. And as Jim Frankis, a partner at King Sturge, points out, rents to the west are now as much as twice as high as the less fashionable half of the capital.
Logistics are also going through a shakeup with the impact of the Channel Tunnel, EC regulations on drive-time and the strong pound. Location is critical to maximise value. Regional centres need to be relatively close to consumers and east London has half this market. Access was so bad in the past that much of the eastern M25 was written off. Improvements to the A12 and A13 have not solved all the problems but they have been critical in cutting journey times into central London.
Ravensbourne MD Michael Henri saw this coming in the late Nineties, switching from overcrowded Heathrow to under-rated A13. Others may have seen this as a niche-market play by a risk-taking minnow. But Henri had a track record with Christiani & Neilsen and legendary chairman Ronnie Lyon was sniffing out new markets before many of today’s hotshots were born. The firm has close to 1m sq ft under development around Barking and Dagenham and is achieving rents as high as £8/sq ft. Two or three years ago, these were closer to £5.50.
Helios is another pioneer of the eastern frontier. ‘We felt that improvements in the roads in and out of London meant transport groups would jump at the chance to locate around Thurrock, where they intersect with the M25,’ says director Mike Hughes. Gut feelings are pointless unless they can be sold, however. Perhaps the most significant advance by this advance guard has been persuading funds to back their hunches. Standard Life is behind the Ravensbourne projects and Helios has PRICOA on board for a £4m warehouse and Schroders came in on another 250,000 sq ft scheme.
This is making funds sit up and take notice of the investment potential in the area. Deutsche Bank recently bought a 100,000 sq ft vacant unit south of the river in deepest Charlton to refurb abnd let at £6.50/sq ft. Threadneedle and Morley are among others in the market. The funds realise they have to do more than wait for inflation and rent increases to improve their performance, says Toby Yorke of Fuller Peiser. Many are also looking at sale-and-leasebacks, which would never have happened a couple of years ago.
But it has not just been lack of funding and decent roads that has stifled previous development. Ironically, the east has suffered in its own way from lack of sites. There was a Catch 22, says Jason Dalby, joint MD of ProLogis Developments. Lack of demand meant large areas of former industrial land was left fallow because no-one seemed to think there was any demand.
He disproved that after 30acres from British Gas at Bromley-by-Bow and pre-letting 187,000 sq ft to Royal Mail at £7.25/sq ft. Pickfords then came along with £7.75/sq ft for 77,000 sq ft.
Other land owners have begun to realise the hidden value of their land, says Frankis. Kestler International released one site at Stratford and won a series of lettings including 25,000 sq ft at £7.50 a sq ft to Newsfax. Another has picked up pre-lets of around 60,000 sq ft at more than £8/ sq ft. These could be explained simply by the A13 access improvements but land prices have been soaring all along the eastern ‘corridor’ into Essex. ‘Site owners are staggered by what they are achieving,’ says Giles Scott of Chesterton. ‘Prices are well above the amount they have been held on the books.’
Nothing will compare, however, to the biggest land release since Docklands was farmed out to developers. Shell is talking to planners about creating up to 10m sq ft of development on the former oil refinery at Shellhaven, Thurrock. The £1bn development, including a new port, could take years to work through red tape but will already have grabbed the attention of international distributors. ‘There is a huge unfulfilled demand for buildings up to 1m sq ft, and no hope of finding this kind of space around the west of London’ says Frankis. He points to IKEA, which looked in all the usual places and ended up in Peterborough.
ProLogis is not waiting for planners to chew over the scheme. Dalby has splashed out almost £30m on three sites in the area, including Shell’s Minoco Wharf at North Woolwich, on the principle that land can only get more expensive.
It is not just big schemes like Shellhaven and the massive regeneration proposed by the London Development Agency around Ford’s former car works in Dagenham. ‘The City is moving east and calling on east London for its services,’ says Dalby. ‘Ther is huge demand from firms like printers and document storage specialists.’
Distributors of everything from sandwiches to stationery would love to be in Docklands, right on the doorstep of huge customers in Canary Wharf and the Royals. ‘But planners want offices rather than warehousing and the land would be too expensive,’ says Hughes. But that merely moves potential pressure outwards into the fringes.
South of the river has been even more fringe over the years, partly because Kent carries an air of remoteness even though it is closer to central London than many hotspots around the west. Intensive lobbying by bodies like Location Kent and headlines generated by Bluewater and Crossways are finally dispersing this prejudice, says Sandra Martyn of Jones Lang LaSalle. Local authorities also show a refreshing willingness to joint-venture developments rather than moan about bad neighbours. She picks out the way ProLogis is working with Dartford ona 250-acre development
East of London will probably never close the gap with the west entirely. ‘It will always be second-division compared with Heathrow, which is European championship material,’ says one investor. But second division clubs can spring shocks when it comes to winning knock-out competitions and there could be a few as developments like the Stratford Channel Tunnel Terminal, Shellhaven and Dartford port facilities come on stream. There is no shortage of international distributors looking for European centres.
There is a certain irony that the two most expensive industrial locations in the world are Heathrow, host to the great airline meltdown, and California’s Silicon Valley of techno-crash fame. Occupation costs fell around the airport by 16% in the second half of last year, according to the King Sturge Global Rents Survey. But by rights, they should have gone through the floor, the basement and much of the way through for bedrock.
The fact that all remains remarkably calm shows how resilient this market is to shocks. Not the whole market: Rogers Chapman has calculated that enquiries dropped more than 40% across the whole of west London after the World Trade Centre disaster, and offices have taken a hammering. Distribution is different.
Firstly, rents were never as high as they were often touted, says Nigel Rowe, director in charge of industrial at Atis Weatheralls. ‘A few telecoms operator pushed the envelope but we still work on £11.75/sq ft,’ he says.
Some fallout has taken place among property closely to the airline and technology industries, but again this is most visible for office property. Supply was so tight for sheds that any fall in demand would still not show up in higher vacancy rates. Not that there are vacancy rates around the airport. Sites are so rare that a 100,000 sq ft building is gone before the ink is dry on the brochure, and at rents similar to smaller units.
Despite this long-running saga of shortages, most tenants have not indulged over the years in the kind of premium payments seen among telecom and air freight operators. Technology companies like web ‘hotels’ saw rents as a minor cost compared with the millions they spent fitting out. Air-freighters had a similar attitude, as they face enormous fines if they cannot shift goods out of planes, off the tarmac and under a roof within minutes.
Logistics and food distribution specialists operate on such fine margins that they cannot afford such indulgence. And as they rarely pay through the nose, they are relatively comfortable carrying surplus space, says Rowe.
It may take another six months to judge the real impact of the turndown but by then the waverers who put requirements on the back-burner may be back in the market. There is also the prospect of a new Heathrow terminal. It may be five years or so away but distribution firms know they face a scalping if they leave deals until closer to the opening.