Brexit result will further restrict development

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Author: Andrew Smith, LondonMetric Property Plc

 

Many of us woke up on Friday 24th June to a new world. The Brexit vote changed the near-term appetite for risk. Financial markets responded and a flight to less risky investment classes quickly emerged.

 

Whilst this is an inevitable initial reaction, the near-term impact could ripple to become medium-term problems for a sector of the market that has been struggling with a demand / supply imbalance for good quality UK logistics accommodation.

 

Supply and availability of Grade A logistics accommodation has fallen from 94m sq ft in 2009 to just 15m sq ft today. This sits against more recent annual take-up, driven by a shift in shopping habits and the rise of ecommerce, in the region of 30m sq ft per annum. In effect, there is only 6 months’ worth of demand available in the market. This supply / demand imbalance has inevitably led to increases in rent as potential occupiers outbid each other to get the right, available, property.

 

The credit crunch restricted the supply of new accommodation from 2009 onwards which has cumulated in the current situation. Rent rises were needed to tempt developers back to the market to start developing a new supply of properties. This had started.

 

Affect of Brexit on Square Footage

Between 2005 and 2008, an average of 10m sq ft per annum of new, unlet, logistics property was being built. Today there is just 4.6m sq ft on-site being developed. We were building, but at half the previous long-term average. The development supply was not keeping up with the increased demand from occupiers before having regard to the explosive growth of ecommerce.

 

So what impact will Brexit have? The reduction in risk appetite is likely to see a halt to capital expenditure projects that are considered non-essential or projects that carry more risk, such as speculative development without a pre-let in place. This could lead to a further squeeze on the supply of available accommodation and, subject to demand levels, could lead to further increases in rent as competition intensifies for the right, available, building.

 

Working in partnership, occupiers and developers can ensure that buildings continue to be delivered and are available at the right time. Forward planning, pre-leasing and committing ahead of construction is likely to become increasingly important. With a standard 9-12 month delivery time from start on-site, decisions to pause capital expenditure as a result of Brexit will lead to a supply crunch not only near-term, but also more medium-term.

 

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