Stephen Barnes, Managing Director Network Space Development.
‘You’ve never had it so good’ isn’t a phrase that I ever thought would apply to the industrial shed market in the north of England. Both the sector we specialise in and our geographical area of operation has to date meant that the delivery of small to medium sized industrial sheds in the north has always been ‘challenging’.
Traditionally, much of our development work has been supported by grants from either local or central government as well as EU funding. This is because historically, the cost of delivering small to medium sized industrial space on a speculative basis has cost more than the space is worth once its developed. Costs have always exceeded value. When I have ever had to explain this concept to property people in London and South East, it is met with puzzled silence. “What do you mean, costs exceed values?” And whilst we don’t yet find ourselves in a position in which public grant support is completely unnecessary, the case for it is has become more marginal and should a scheme prove successful (in terms of the cost of delivery, speed and quality of the lettings etc) it is more than likely not required at all.
Therefore, the case we are now increasingly making to public sector partners is that their support de-risks a project in the event that we don’t achieve the rental levels, occupancy levels and quality of tenants that we aspired to secure at the start of the project. And in the event that we do, we are able to re-pay part or all of the grant money we receive.
The reasons for this are numerous but can be summarised by UK and international investor appetite for industrial space driving up the capital value of schemes that are delivered, a relatively healthy occupier market that is re-adjusting to different consumer habits (predominantly around retail), restricted supply of new property given the challenges involved with bringing forward new space and the increasing levels and choices of finance available to support development.
Our scheme at Tunstall Arrow is a case in point. We purchased the site in 2013 from an owner that had got into difficulty in the last recession. We ultimately delivered the completed 127,000 sq ft scheme in September 2018; some 5 years later. Our estimates for costs and values at the outset of in 2014/15 were considerably different to the position we found ourselves in 2019. During the intervening period, the value of the space increased significantly and the occupier market improved to the point that the scheme was fully let some 5 months following its completion generating an investment value which for outweighed our original estimates. Where there was once a strong case for grant support, the outturn position suggests less so.
This success isn’t simply down to good fortune. Our forecasting back in 2014/15 was both informed and conservative whilst the Company’s financial structure allowed us to self-finance one of the biggest speculative developments the business has ever taken on. A huge risk for the business to take at the time and one that has paid off.
So whilst we have, ‘never had it so good’, we are still some way off having it as good as it needs to be to make the delivery of these schemes routine and of course, there are always challenges that lurk. Clearly, current political and economic uncertainty has the potential to affect us whilst on the other hand, strong markets drive more competition, ever more scare opportunities and higher costs. Fundamentally though, as a business, we are extremely well placed and well resourced, in terms of staff and finance and are well structured and managed. We are also operating in a market sector that is as resilient as any. All in all, not too bad a position to be in and one that will hopefully allow us to capitalise on ‘never having it so good’!