The sheds market is in a perfect storm. On the one hand demand for industrial and warehouse stock is continuing to rise significantly, while on the other we’re seeing available stock levels continuing to dwindle in the region we operate in.
According to data from our Q3 Databook 2016, demand is 28% higher in north, south and east London, and in Essex, Kent and Hertfordshire, than it was pre-Brexit vote.
The rate at which demand has grown is simply too much for the market to keep up with, especially when you consider that institutional investors’ desire to fund speculative developments has waned.
The perfect storm is driving rents, both prime and secondary, to a high level and certainly exceeding those rents achieved before the global financial crisis.
This upward pressure on rents caused by the imbalance in supply and demand is being exacerbated by alternative use redevelopment pressures, tenants seeking business planning certainty and the number of leases that have been granted outside the security of tenure provisions of the Landlord and Tenant Act.
The dwindling supply is not just limited to prime stock and is also creating a very compelling secondhand rental growth story. While prime rents perform strongly, moving ahead of rents adopted to development appraisals, it is the secondhand rents that have jumped at a pace, forcing the rental gap between prime and existing stock to narrow. This can act as a break to development and further exacerbate the supply problem, thus causing a catch-22 situation.
Within Glenny’s core agency catchment, there has been a negligible 2.5% vacancy rate feeding strong rental growth. Tenants are demanding certainty, causing them to opt for longer leases, forego lease breaks and seek protection from the Landlord and Tenant Act.
Some might say it’s a landlords’ market, given the relationship between supply and demand, but as we know, tenants are the ones who create the demand, drive expansion and generate the market deals. This is now the right time for close engagements, irrespective of lease events.
In this landscape, prudent tenants will align their property portfolio with their business objectives, and may regard a market-leading rent worth paying if they can secure the right premises at the right lease length with Landlord and Tenant Act protection.
Beginning that dialogue without an impending lease expiry on the horizon allows a collaborative approach to landlord and tenant negotiations and removes undue pressure.
Landlords and tenants must recognise the need to engage early to try and create security for their property portfolios
An immediate response to this storm is the vacation of tenants that can’t afford the high rents in desirable locations, such as those within the A406, to areas where the rents are more affordable.
As a result, well-connected outer-London alternatives such as Harlow and Basildon are receiving strong occupational interest. A long-term solution is to provide more land designated for business space, specifically urban logistics in high-density locations.
We’re witnessing some sites being brought forward, but they are limited and more are needed.
We expect the gap between secondary and prime to continue to narrow and landlords and tenants must recognise the need to engage early to try and create security for their property portfolios in what could be an uncertain economic and political climate in the coming years.
If we are at a high water mark, will the level keep rising? It’s as difficult to predict as the British weather.
William Martin is lead surveyor in lease advisory at Glenny
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