Road and rail come togther for real estate investors

Copyright: David Lawson - Property Week August 1997

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A 37-hour trek between the bluff hills of South Yorkshire and romantic faraway destinations like Milan is an unlikely candidate for a TV slot as one of the great railway journeys of the world. The producers would be hard-pressed to find space for a celebrity traveller and camera crew, however. The snaking line of waggons chugging out of a floodlit estate near Wakefield are  crowded with containers holding  anything from personal computers to steel coils.

 Long-distance rail freight is re-emerging as an alternative to roads after decades of decline, and interest is gradually stirring among   developers and investors. New kinds of distribution centres have emerged which link the two kinds of transport.   The idea is not new. Back in the Eighties it attracted as big a name as Godfrey Bradman, who was planning such interchanges through  the French firm Garonor before he diverted into reshaping the London office skyline.

  'But the time wasn't right,' says David Baker,  of transport and property specialists Baker Rose. 'A series of changes have taken place over the last few years that have revived interest in rail freight.'  The Channel Tunnel is the most obvious, creating an unbroken link from the north of Scotland to centres right across the European mainland. But just as important was a  directive already made by Brussels which standardised waggon gauges so they could run on lines in any EC country.

  Rising concern over road congestion has also shifted the balance. The new Labour government set out its stall by slashing new road schemes but this is not a party political matter. The Tories cut even more deeply and started a process of restrictions on lorry weights and drive times, planning rules demanding alternative transport links and  grants for private rail facilities. Privatisation of British Rail has brought an extra factor into play. Railfreight Distribution had already planned nine 'intermodal Euroterminals' to create an international network. The new private operators are steaming ahead with plans for feeding these with cheaper, more efficient services.

  This is crucial to change decades of decline in which rail freight has fallen to between 6% and 8% of the market.  'One of the biggest barriers came from manufacturers and distributors, who did not trust rail transport,' says Baker. Now, demand is surging. He dismisses doubters who question whether rail can make significant advances, pointing to the potential of big occupiers returning to historic techniques of linking rail directly to major plants and warehouses. Rover, for instance, put Hams Hall on the west Midlands map by choosing the interchange for a new engine plant.

  But what input is feasible from the property industry? Investors like Hermes, Kyle Stewart  and Burford have dived into the fray and Legal & General is expanding its interest in rail/road interchanges. But the massive sheds - often built to specific occupier needs - which typify major freight parks do not sit easily in the average investor's portfolio. Joint ventures are the order of the day - either developer and local authority like the Kyle Stewart venture in Doncaster, or fund and developer such as AMEC and Hermes at Wakefield.

  They are all  taking a punt on potential growth, as there is little evidence of premiums so far. Asking rents are rarely higher than for  other sheds in local markets.  Baker points out that it can be difficult to separate the influence of rail in any case, as  all the  prime schemes would be a successful  road-based distribution centre even if there were no interchange facilities.

  Roger Saper of Jones Lang Wootton, who are among Hermes' advisers on schemes like the 365-acre Daventry International Rail Freight Terminal says it is too early to establish the strength of the investment market. But he feels that yields reach  a 1% margin over schemes without rail links.

 One danger is that freight could go the way of business parks, with landlords  ramping up every site with half a chance of a rail link. Up to 20 developments could be under way by the end of the decade but  Baker's partner Peter Hunt points out that 'there are traps for the unwary'.

  Not enough research has been done into the feasibility of some sites to meet problems of road access, restrictions on rail waggon size and timetabling by the new freight companies. He points out that while new opportunities are arising all the time, some freight villages have stagnated or even regressed over the last year.

  Distribution is a different world from the days when Bradman considered  introducing the French-style approach of Garonor to sites in London, Yorkshire and the West Country. Even the language has changed. Computerised boffins  now plan   'intermodal nodes' as part of 'logistics networks'.

  Potential for expansion of this sector are undeniable, but occupiers are not going to be shunted anywhere unless the property industry is just as sophisticated in its reading of their needs.


Andrew Martin is not what you might consider a classic train buff. No anorak, no Thermos, no hastily scribbled notes of numbers snatched in some trip to a far-flung rail depot. Yet the chief estates manager for Hermes Property Asset Management is as enthusiastic about choo-choos as a babe with his first train set.

  Enthusiastic enough, in fact,  to spend all his pocket money promoting a clutch of developments hooked to main rail lines. And he has deep pockets. The current allocation is a cool 140m pounds and there may be more to come.

 Martin, like much of the property industry, is a relatively new  convert to the delights of rail travel. Most of the money for developments in South Yorkshire, the east Midlands and Wales has been set aside  only in the last couple of years. 'It was not some great shining light that hit us,' he insists. 'A number of factors appeared to be coming together which justified looking at the possibilities.'

  The most obvious was the Channel Tunnel, which opened  direct rail access to Europe. 'We thought this could have a substantial impact on the patterns of distribution in the UK, particularly in combination with other factors like increasing road congestion and the developing European Single Market.'

   Hermes was also  reassessing industrial holdings in its 3bn pound property portfolio, with the aim of shaking out older and more obsolete assets  and investing in better growth prospects. Transport consultants  Roger Tym and property specialist Taylor Wells were called in to predict potential changes.

 'They evaluated every site in the UK capable of providing large distribution parks and with the best prospects for attracting occupiers and achieving good rents,' says Martin.

  Hermes set strict conditions, including capacity for at least 150,000 sq m (1.6m sq ft), a balance of freehold and leasehold and an established development partner. The fund refused to consider  coping with contamination or land close to housing, which would limit operational hours. Most important, it would not pay a premium for rail access. 'That swiftly cut the list of possibles from 30 to three,' says Martin.

   The lion's share (75m pounds) is committed to the Daventry International Rail Freight Terminal (Dirft) on Junction 18 of the M1 being developed by Abbcott Estates, a subsidiary of Severn Trent  Water and Associated British Ports.

  This is planned as a national node linked to the West Coast main line. When fully let, it is expected to handle 1m tonnes of freight  a year from a potential 371,8700 sq m (4m sq ft). Roger Saper of agents Jones Lang Wootton says buildings are likely to range upwards of 4,650 sq m (50,000 sq ft) and there are inquiries for more than 185,000 sq m (2m sq ft) from potential occupiers.

  Haulage contractor Eddie Stobart has done the first deal with a 46,450 sq m (500,000 sq ft) centre which could cost 25m to build.  Ironically, Hermes has not bought the scheme. Haslemere stepped in to fund it, showing that other leading investors are also being drawn in.

 Another 34m pounds will go to AMEC's Wakefield Europort. This has a potential capacity similar to Dirft, but   Hermes adviser Richard Taylor says it will serve a different market as  a regional distribution node.

 Two speculative units have been started but these are on a much smaller scale - up to 2,750 sq m (30,000 sq ft). Rents are likely to be  around 43 pounds\sq m (4 pounds\ sq ft) on both schemes - plus any premium that can be won for the rail access, although at this stage, few observers expect such a bonus.

 A further 30m pounds  has been allocated for Gwent Euro Park, being developed by Morrisons on the M4 in South Wales. This could be the weakest of the Hermes trio because of potential competition as a regional node from Wentloog to the west - which has won big grants - and Burford's Avonmouth proposals across the Bristol Channel. But Taylor points out that rents are 30% of those around Bristol and wages 1,000 pounds a year lower.

 Permission has been granted for more than 240,000 sq m (2.6m sq ft) of B8  and the 60,000 sq m (640,000 sq ft) first phase has already gone to Tesco. Saper says considerable interest is coming in for rail-linked terminal buildings.

   One  powerful factor which links all these sites can be overlooked in the fuss over potential rail expansion: each is a prime motorway site. That speaks volumes for the way this new sector is being grafted onto an established market.

  Obviously, switching loads between trains and lorries  needs good road links, but each of these developments has been chosen with a fallback that if the rails were torn up tomorrow, they would still be viable. In fact, one of the preconditions  by Hermes was that sites should have 'exceptional' road transport and strong local demand for buildings, not just requirements for rail.

  Despite increasing confidence in these intermodal nodes, rail is still not important enough to carry a major location. It is icing on the cake. Many believe that sweet layer will thicken, however.

 'There are fundamental factors moving the balance in favour of rail,' says David Baker of Baker Rose, project consultant for leading developments including Dirft and Burford's Cabot Park, Avonmouth.

  These range from government pressure here and in Europe for controls on road congestion through the increased efficiency of rail privatisation  to the changing patterns of distribution in a single European market. Rail distribution begins to challenge the economics of road transport when goods are carried more than 300 miles.

  'These developments are not being pulled out of a hat,' he says. 'They are being demanded by occupiers. Retailers and manufacturers are already restructuring their networks.'

  Some observers are less optimistic, feeling that the love affair with roads is so powerful that  rail will struggle  to expand significantly beyond the current 6%-8% of the freight market. But    Martin is confident that the Hermes investment has little downside and a lot of promise. For a start, the 140m pounds is earmarked only for pre-lets, so risks are limited.

 'We anticipate that quality of service and cost will start to compete with road transport so that rail could take 10% of traffic between the UK and the continental mainland over the next five to 10 years,' he says.


When Burford polled occupiers about what they would like in a distribution centre, one demand stood out: an alternative to road transport. 'People are not going to switch wholesale to rail tomorrow, or even next year,' says Burford director Duncan Moss. 'But occupiers can see the way the wind is blowing with increased congestion, a new government cutting road schemes and the possibility of  tolls.'

  That helped focus the company's mind about plans for the 450 acre Avonmouth site bought for 9.4m pounds from RTZ last December.  Moss called in consultants Baker Rose to plan 78 acres of the site as a railfreight terminal.  That has generated almost 93,000 sq m (1m sq ft) of inquiries even though site work does not start until next year. 'When you get to those levels of demand, it is more than just insurance against change,' says Moss. 'Rail may take a couple of years to push into the headlines but it has to be taken seriously now. If it does take off, it will do so in a big way.'

  He points out that freight distribution specialists operate on tight margins and short contracts, so they will jump at the chance of any extra benefit. The south west also has no alternative regional rail-road centre to attract them. The site, dubbed Cabot Park, has permission for 278,000 sq m (3m sq ft) split between the rail interchange, a distribution park and a business village, which could have an investment value of 200m pounds when complete.  Moss sees the mix of uses - all at a low density of 27% site cover - as an important factor.

 He is aiming not at a single-purpose, heavyweight rail depot but an integrated park including  small units, a business centre and intensive  hands-on management. This would provide a foothold for tenants which would like to be near a railhead but do not need lines running to the building.   'We are very keen to maximise the attraction to smaller companies, particularly those who can move up the scale within the park,' he says.

  A final advantage could be the access to the neighbouring deep-water port. 'This could turn Cabot Park into an international distribution point, where road, rail and shipping meets,' he says.


Take 60 acres of flattened steelworks. Cover with a thin layer of tarmac but refrain from the temptation to throw up walls and roofs. Instead, spread generously with several thousand cars. Sit back and savour slowly over several years as rents escalate.   One crucial ingredient is necessary to ensure a good result, however. Pierce the site with a rail line before consuming.

  It seems supremely ironic that car distributors should be playing a major role in the revival of rail freight but they have been among the first to reorganise European networks. Many car parts are shifted in bulk rail containers between suppliers and factory. And the end product is often stored in large numbers at rail heads for export.

 Stuart Beevor, property director of Legal & General, is happy enough with the result after paying  almost 10.2m pounds to fund construction of a giant car park on the  Corby steel works site by Kingspark two years ago. This produced not just an initial rent of 900,000 a year from Peugot, but an uplift of 3.5% a year.  He now has another deal lined up involving rail/road distribution. 'The market is still new enough that rail access does not cost a lot more,' he says. 'It seems logical that if you can get something extra for almost nothing it must be a winner.'

  As the giant fund joins Hermes in the market for rail/road interchanges, it may not be long before others swarm in and the something-for-nothing deals dry up. 'No-one can  forecast how quickly rail will become an important sector of the market. But you can bet that there can only be more trade switching from road. Those are odds I like,' says Beevor.