Property moves in cycles but with some speculating that the current boom in the industrial sector is reaching its peak, how do we know when is a good time to embrace development without getting our fingers burnt? Martin Mellor, director at Network Space discusses the importance of timing to stay ahead of the curve.
Industrial property is currently a very popular asset for commercial property investors. Once perceived as the poor relation of the commercial property world, increase in demand has seen it catapult to the top of the desirability stakes. Ten years on from the recession, it’s now economically viable to develop again and in a climate where sheds are the new shops, industrial space is finally enjoying its moment in the spotlight.
The previous stigma attached to industrial was almost certainly linked to the value profile attached to it. The more glamorous offices and retail offerings have historically seen a healthy level of growth and higher rents, whereas industrial property rents have been low and pretty much levelled off. For example, where central Manchester office rents have seen a rise from £7 per sq ft to more than £30 over the last 30 years, industrial rents have only gone from around £4 to £5.50 per sq ft on average.
But the tides are turning, and industrial rents must move on now. Developers with high quality stock in desirable locations shouldn’t be ashamed to ask for more; demand is high, and stocks are low, so developers should reap the long-awaited rewards.
We are confident about the quality of our product and the portfolio that we have developed post-recession. We’ve benefitted from good timing and market knowledge; by acquiring property in 2011 rather than 2009, we could purchase it at a lower rate in comparison to what it would cost to build new. After all, why would we consider developing new stock at a time like this? What’s the point in building at a loss? It was a perfect opportunity for us to invest in stock that we could upgrade to a high specification, to meet tenant requirements.
As an investor, it was possible to buy at a discount if the stock was good enough quality. That’s how we grew our portfolio after the recession. We hadn’t been in debt during the recession, so when the time was right, we made the decision to spend a lot of money buying up property and later decided to sell that stock on and reinvest the money into building new property.
The truth is, you should never fall in love with your assets to the point where you feel like to want to keep them forever. Part of the skill behind keeping up with the market is knowing when to sell and when to re-invest in new property if you want the best property that will drive the best returns.
So, what about the future? The increase in values that we’re currently enjoying is very positive for the industry. People are always trying to ‘call the top of the market’ but the volume of debt that was in the market pre-recession isn’t so bad now, it is more controlled. Funds and pension funds are regulated so I don’t think it will drop of a cliff in the same way we’ve seen in the past. There may be fluctuations and rents won’t carry on growing at the same rate, but as long as we build and sell at the same rate, and assuming construction costs don’t go through the roof, we should be fine.
For a business to grow, there needs to be an interest in building your land bank, but it won’t produce returns unless you do something with it. How you fund it is also very important and there are lots of smart ways to do that. It can often just be about holding your nerve until the market conditions are right for you, and debt isn’t a bad thing as long as you manage it, it can make your money go further. You just need to trust your own good judgement and take sound advice from those in the know. As my mother used to say, “stick to your knitting.”