PRIME LOGISTICS - International Property Consultants - Gerald Eve

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PRIME LOGISTICS - International Property Consultants - Gerald Eve
PRIME LOGISTICS
         The definitive guide to the UK’s distribution property market
         Spring 2019

International Property Consultants
PRIME LOGISTICS - International Property Consultants - Gerald Eve
www.geraldeve.com
PRIME LOGISTICS - International Property Consultants - Gerald Eve
CONTENTS

                                   Page

Introduction                          4
2018 highlights                       5
UK market overview                    6
Occupier demand                       8
Amazon warehouses                    12
Supply                               14
Development                          16
Rents and incentives                 19
Investment                           20
Outlook                              23

The Gerald Eve regions               29
Avon & Somerset                      30
Berkshire & Wiltshire                32
Buckinghamshire & Bedfordshire       34
Cambridgeshire                       36
Gloucestershire & Worcestershire     38
Greater Manchester                   40
Humberside                           42
Kent                                 44
London East                          46
London North                         48
London South                         50
London West                          52
Merseyside & Cheshire                54
North East                           56
Northern East Midlands               58
Northern West Midlands               60
Oxfordshire                          62
Scottish Central Belt                64
South Coast                          66
South Wales                          68
South Yorkshire                      70
Southern East Midlands               72
Southern West Midlands               74
Suffolk & Essex                      76
Surrey & Hampshire                   78
West Yorkshire                       80

Glossary                             82
Contacts                             83

                                          3
PRIME LOGISTICS - International Property Consultants - Gerald Eve
INTRODUCTION

Welcome to Prime Logistics 2019.
Our Prime Logistics research has been providing the industry with
detailed and impartial analysis on the UK logistics property market
since 2006. Covering buildings over 50,000 sq ft in size, this latest
update draws on 13 years of quarterly data across each of our
26 Gerald Eve regions and provides you with the tools to help
unlock the inner workings of this in-demand asset class.

UK prime logistics property remains one of the most compelling
investment propositions out of all commercial property asset
classes. Occupier demand is strong. Supply is restricted, developer
confidence is high and rents have grown strongly. However, 2019
has begun with a flurry of negative economic data and it seems that
the impact of Brexit is now taking its toll on the real economy.

Should we experience a disorderly Brexit, we would expect major
short-term disruption to both the economy and equity markets.
Commercial real estate, already late in the market cycle, is not going
to avoid these negative impacts. However, the logistics sector is
far less vulnerable than both the office and retail sectors given the
‘structural’ shift we have seen in the occupational market.

In November last year, online sales as a proportion of all retailing
exceeded 20% for the first time. This structural shift in shopping
patterns has translated into increased demand for logistics space
from both dedicated internet retailers and traditional high street
retailers increasing investment into their distribution networks.
Such a structural shift is likely to help insulate the asset class
against external economic shocks.

However, the industrial and logistics sector is not going to be immune
from negative movements in the broader economy. Whilst on the one
hand demand from internet retailers is high, on the other, demand
from the manufacturing sector, in particular the automotive sector,
what with recent announcements from Honda and Nissan, has been
weaker. In recognition of these downside risks, we have this year
reduced our overall rental growth expectations for the next five years.

We continue to invest in our industrial and logistics team, with senior
recruits and the creation of dedicated business groups focusing on the
issues and areas that are important to you. We will continue to adapt
our offering to keep pace with the changing nature of the market,
and, we look forward to helping you execute your 2019 industrial and
logistics strategies.

                                      John Rodgers
                                      Capital Markets
                                      Tel. +44 (0)20 3486 3467
                                      Mobile +44 (0)7810 307422
                                      jrodgers@geraldeve.com

www.geraldeve.com
PRIME LOGISTICS - International Property Consultants - Gerald Eve
2018 HIGHLIGHTS

                million     2018 take-up of big sheds
 50.5           sq ft          over 100,000 sq ft+
                                                         15%
 2018 take-up                                            of all take-up by
                                                         dedicated online
 second largest
 year on record                   40%                    retailers
                                                         in 2018

          million                                                      per
 7.3      sq ft             3.6%                         1.2%          year
 under construction         prime rental                 UK annual prime
 speculatively and          growth                       rental growth forecast,
 due to complete            in 2018                      2019-2023
 in 2019

     It’s at times like this, where granular, impartial data and insight, such
     as with our Prime Logistics research is crucial to identifying areas of
     potential outperformance. Together with Multi-let, our market-leading
     research on the small shed market, we are well placed to help you
     underwrite industrial and logistics assets of any size.

                                                                                   5
PRIME LOGISTICS - International Property Consultants - Gerald Eve
UK MARKET OVERVIEW

In this section we provide a long term national
overview of the UK logistics market of
buildings over 50,000 sq ft in size within our
26 Gerald Eve regions. This includes a review
of the following topics:

• Occupier demand
• Market supply
• The development market
• Rents and incentives
• The investment market
• A five year outlook

www.geraldeve.com
PRIME LOGISTICS - International Property Consultants - Gerald Eve
KT353, a 102,000 sq ft purpose-built parcel hub and UPS’ main Inner
London facility, was sold by Gerald Eve for £61 million during 2018.

                                                                       7
PRIME LOGISTICS - International Property Consultants - Gerald Eve
OCCUPIER DEMAND

Take-up
•        50.5 million sq ft of occupational space was transacted during                                         •        A slight difference with occupier demand in 2018 was the
         2018; a 22% increase on 2017 and a whisker behind 2016’s                                                        nature of the transactions on new space. Straight letting activity
         record-breaking level of 50.6 million sq ft of take-up.                                                         still drove the market in 2018, but we saw more pre-lets and
                                                                                                                         fewer occupier development sales in 2018. Occupiers chose
•        2018 turned out to be another very strong year for the UK
                                                                                                                         to sign pre-lets or agree to pre-sales with incumbent landlords
         logistics market. This is particularly encouraging given the
                                                                                                                         more than purchase development land to develop facilities for
         unusual economic and political environment in which the UK
                                                                                                                         themselves in 2018.
         finds itself in. The uncertainty surrounding the UK’s future
         relationship with the EU has dominated headlines through                                               •        There are several reasons why occupiers purchase land for
         2018, as has the weak retail sales figures of several high street                                                development. Retailers such as B&M Bargains and budget
         retailers, but in some instances, these ostensibly negative                                                     food retailers such as Aldi and Lidl have favoured this option to
         indicators have perversely fed through into increased demand                                                    secure bespoke logistics space, citing the supply shortage and
         for UK logistics space.                                                                                         the offer of more choice as to location, labour pool and building
                                                                                                                         specification as the rationale. However, it was pre-letting activity
•        This strong annual performance has cemented a new era of
                                                                                                                         which drove the take-up of new and refurbished space in 2018.
         elevated levels of occupier demand for UK industrial property.
         Indeed, for the last five years, the annual volume of space taken-up                                    •        Land suitable for warehouse development is in short supply
         has been above the ten year average and 2018 ended up being                                                     and values are at very high levels. These may be factors in
         24% up on the 10 year average.                                                                                  occupiers not purchasing development land at the same level
                                                                                                                         as in 2017, however, it may also be indicative of the enhanced
•        Several parallels can be drawn between occupier activity in
                                                                                                                         deal packages which occupiers feel they can attain by agreeing
         2016 and 2018, both in terms of volumes taken-up and in
                                                                                                                         to long leases in the current environment. There are a number
         terms of the type of buildings occupied. 57% of all occupier
                                                                                                                         of landlords and investors willing to forward-fund developments
         demand in 2018 was for new purpose-built or speculatively-built
                                                                                                                         and some occupiers may believe that they can leverage their
         buildings. Demand for new space is now the driving force of
                                                                                                                         strength in the current market to best effect by agreeing to
         the logistics market.
                                                                                                                         pre-let facilities.

Annual take-up, by property quality and ten year annual average,                                                Annual take-up, by building size, 2005-2018
2005-2018                                                                                                       Source: Gerald Eve
Source: Gerald Eve

          Million sq ft                                                                                                   Million sq ft                                                                              ‘000 sq ft
    60                                                                                                              60                                                                                                            220
                                                                                                                                                                                                                                  200
    50                                                                                                              50                                                                                                            180
                                                                                                                                                                                                                                  160
    40                                                                                                              40
                                                                                                                                                                                                                                  140
                                                                                                                                                                                                                                  120
    30                                                                                                              30
                                                                                                                                                                                                                                  100
                                                                                                                                                                                                                                  80
    20                                                                                                              20
                                                                                                                                                                                                                                  60

    10                                                                                                              10                                                                                                            40
                                                                                                                                                                                                                                  20
     0                                                                                                               0                                                                                                            0
              2005

                     2006

                            2007

                                   2008

                                          2009

                                                 2010

                                                        2011

                                                               2012

                                                                      2013

                                                                             2014

                                                                                    2015

                                                                                           2016

                                                                                                  2017

                                                                                                         2018

                                                                                                                              2005

                                                                                                                                     2006

                                                                                                                                            2007

                                                                                                                                                   2008

                                                                                                                                                          2009

                                                                                                                                                                 2010

                                                                                                                                                                        2011

                                                                                                                                                                               2012

                                                                                                                                                                                      2013

                                                                                                                                                                                             2014

                                                                                                                                                                                                    2015

                                                                                                                                                                                                           2016

                                                                                                                                                                                                                  2017

                                                                                                                                                                                                                         2018

              New purpose-built                                       Secondhand                                              50-100,000 sq ft                                        250-500,000 sq ft
              New speculative                                         10 year annual average                                  100-150,000 sq ft                                       500,000 sq ft
                                                                                                                              150-250,000 sq ft                                       Average unit size (RHS)

www.geraldeve.com
PRIME LOGISTICS - International Property Consultants - Gerald Eve
•        The take-up of speculatively-developed space accounted for                                             •   The majority of the deals recorded by the manufacturing sector
         12% of all take-up in 2018, up on the 8% in 2017, but less than                                            involved smaller buildings and on this type of stock, we recorded
         the 17% in 2016. Occupier demand for speculative space was                                                 a number of automotive-linked and housebuilding-related
         focused on the Northern and Southern East Midlands in 2018,                                                manufacturers take space in 2018. We also saw a number
         with 29% of all demand for speculatively-developed space                                                   of medical and pharmaceutical manufacturers as well as
         taking place in these regions.                                                                             packaging manufacturers take space in 2018.
•        The North West also saw a large share of occupier demand                                               •   Retailers and wholesalers accounted for 38% of all demand
         for speculative space in 2018, with Greater Manchester and                                                 in 2018, recording over 19 million sq ft of take-up. Dedicated
         Merseyside & Cheshire together accounting for 23% of all                                                   online retailers were an important segment of this demand,
         speculative space taken-up.                                                                                although both the traditional retailers and budget food retailers
                                                                                                                    were also acquisitive during the year.
•        The elevated levels of demand for new space, in particular
         the commitment by occupiers to large pre-lets, has driven the                                          •   Demand from dedicated internet retailers, not including the
         average deal size agreed in 2018 to over 167,000 sq ft, the                                                parcel and post occupiers or those retailers which run online
         highest since 2010.                                                                                        delivery services alongside traditional retail logistics, has
                                                                                                                    increased substantially over the last six years.
•        On an annual basis, there was less space taken-up in buildings
         between 50,000-100,000 sq ft in size in 2018 than 2017,                                                •   With record-breaking levels of acquisitions by Amazon in 2016,
         perhaps in line with the drop in take-up from the manufacturing                                            when the company took over 8 million sq ft of space, volumes
         sector. For units over 100,000 sq ft, driven by retail occupiers,                                          dropped in 2017, but have once again risen in 2018 with the
         who often have larger requirements for space than manufacturers,                                           online retailer taking over 5 million sq ft of warehouse space.
         the volume of space taken-up increased by 40%.
                                                                                                                •   Amazon committed to the two largest warehouses of the year,
•        In a switch from the high levels of activity of manufacturers in                                           with a pre-let at Integra 61 for a 2 million sq ft multi-storey unit
         2017, where the occupier sector accounted for 34% of all take-up,                                          and a 1.5 million sq ft pre-let at Link 66 in Darlington. Over the
         the manufacturing sector represented just 18% of occupier                                                  past 5 years, Amazon have committed to almost 19 million sq ft
         space taken-up in 2018. Manufacturers accounted for just one                                               of space nationwide, across 51 deals.
         deal over 500,000 sq ft in 2018, with BSH Home Appliance’s
         pre-let of 945,000 sq ft at Midlands Logistics Park in Corby.

Total annual occupier take-up, by event, 2005-2017                                                              Retail and wholesale take-up, six year comparisons,
Source: Gerald Eve                                                                                              2007-2012 and 2013-2018
                                                                                                                Source: Gerald Eve

          Million sq ft
    60

    50

                                                                                                                2013–
    40                                                                                                           2018

    30

    20                                                                                                          2007–
                                                                                                                 2012

    10

     0
                                                                                                                        0               20              40                   60          80   100
              2005

                     2006

                            2007

                                   2008

                                          2009

                                                 2010

                                                        2011

                                                               2012

                                                                      2013

                                                                             2014

                                                                                    2015

                                                                                           2016

                                                                                                  2017

                                                                                                         2018

                                                                                                                                                             Million sq ft

              Development land purchase                               Occupier freehold purchase                            Other internet retail
              Letting                                                 Pre-let / pre-sale                                    Amazon
                                                                                                                            Retail and wholesale (excluding dedicated internet retail)

                     This strong annual performance has cemented a new era of elevated
                     levels of occupier demand for UK industrial property.

                                                                                                                                                                                                    9
PRIME LOGISTICS - International Property Consultants - Gerald Eve
2018 take-up by occupier business sector
Source: Gerald Eve

Services 5%                                                                                                          2% Healthcare logistics

                                                                                                                           3% Parcel & post
Services 5%

Traditional retail 12%                                                                                                  23% Logistics

                                                                                                                    18% Traditional logistics

                                                                                                               2% Automotive manufacturing
Dedicated online retail 15%
                                                                                                            2% House building manufacturing

Retail & Wholesale 38%                                                                                          18% Manufacturing

                                                                                                               13% Traditional manufacturing

Budget food retail 10%

                                                                                                               Other/unknown 16%

Automotive retail 2%                                                                                                   Other/unknown 16%

•   Compared to the period 2007-2012, where internet retailers          •   The regions which saw the largest volume of occupier
    accounted for 15% of all retail and wholesale demand, between           take-up in 2018 were the North East and the East Midlands.
    2013 and 2018, dedicated internet retailers have both taken             Amazon’s decisions to take two very large buildings in the
    more space and accounted for an increased percentage of all             North East and large deals by occupiers including Wayfair,
    retail demand, at 33%.                                                  BSK Home Appliances, Eddie Stobart and Shop Direct,
                                                                            ensured a stellar year for these two regions.
•   As well as a strong showing from occupiers in the retail and
    wholesale sector, we also recorded a 21% increase in the volume
    of space taken by logistics occupiers in 2018. Central locations,
    including the Northern East Midlands and Southern East Midlands
    and Merseyside and Cheshire, were the focus of logistics
    occupier demand in 2018.

www.geraldeve.com
Total occupier take-up by region 2018
Source: Gerald Eve

                                                           M90
                                                                                                              Over 4 million sq ft
                                        M8
                                             M73        SCOTTISH                                              3-4 million sq ft
                                                   M8   CENTRAL BELT                                          1-3 million sq ft
                                        M74
                                                                                                              Below 1 million sq ft

                                                           A74

                                                                      M6
                                                                               NORTH EAST

                                                                                           A1

                                                                                    WEST             HUMBERSIDE
                                                                                    YORKSHIRE         M62

                                                                                   M62
                                                                                                M1
                                                                      M56
                                                                            GREATER    SOUTH
                                                                            MANCHESTER YORKSHIRE
                                                                                             A1

                                                           MERSEYSIDE
                                                           & CHESHIRE

                                                                       NORTHERN      NORTHERN EAST
                                                                       WEST MIDLANDS MIDLANDS

                                                                            SOUTHERN
                                                                            WEST MIDLANDS SOUTHERN CAMBRIDGESHIRE
                                                                                            EAST MIDLANDS A1       SUFFOLK
                                                                                                                   & ESSEX
                                                                                             BUCKINGHAMSHIRE      A14
                                                                      GLOUCESTERSHIRE        & BEDFORDSHIRE M11
                                                                      & WORCESTERSHIRE             M1
                                                                                        M40
                                                                                                   LONDON NORTH
                                                                             M50
                                              SOUTH                                            OXFORDSHIRE
                                                                                                                  M25

                                              WALESM4                                                      LONDON LONDON
                                                                                   M4
                                                                                         BERKSHIRE         WEST       EAST
                                                                       AVON &            & WILTSHIRE
                                                                       SOMERSET                               M25
                                                                                                                  LONDON
                                                                                                                               KENT
                                                                                                    SURREY & M23 SOUTH
                                                                 M5
                                                                                                                           M20

                                                                                           SOUTH M3 HAMPSHIRE
                                                                                           COAST

                                                                                                                                      11
AMAZON WAREHOUSES

Warehouses occupied by Amazon in the
Gerald Eve regions, Q4 2018

                                                            M90

                                       M8

                                            M73
                                                  M8

                                       M74

                                                            A74

                                                                       M6

                                                                                         A1

                                                                                                                   M62

                                                                                   M62
                                                                                              M1
                                                                       M56

                                                                                                              A1

                                                                                                                                    A1

                                                                                                                                                      A14
                                                                                                                                          M11
                                                                                                                         M1
                                                                                                   M40

                                                                             M50                                                    M25

                                                       M4
                                                                                   M4

                                                                                                                              M25
                                                                  M5
                                                                                                                              M23               M20

                                                                                                         M3

www.geraldeve.com
UK internet retail

                          AMAZON
                                       million
   19.8%                  19           sq ft
   Online sales as        Take-up
   a proportion of        (2014-2018)
   all UK retailing
   (December 2018)
                           Every sq ft
                           Amazon
                           occupies
                           represents
                           2.9 UK residents
   £1.86 billion       Sources: ONS, Gerald Eve

   Average UK weekly
   internet sales
   (December 2018)

   14%
   Annual growth
   in weekly
   spending online
   (December 2018)

Source: ONS

                                                  13
SUPPLY

Avaliability                                                               Annual volumes of availability by building quality, 2007-2018
                                                                           Source: Gerald Eve
•   Between 2009 and 2014, the volume of available space on
    the market showed sharp reductions year-on-year. Despite the                 Million sq ft                                                                                                                  %
    steadily increasing levels of speculative development since 2015,      120                                                                                                                                      18

    this has done little to the overall volume of space on the market                                                                                                                                               16
                                                                           100
    for occupiers to choose from.                                                                                                                                                                                   14

•   Robust occupier demand has kept volumes low and since 2015              80                                                                                                                                      12

    availability rates have largely flat lined at around 6%, culminating                                                                                                                                             10
                                                                            60
    in an availability rate of 6.2% at the end of 2018. The rate of                                                                                                                                                 8
    availability in the UK seems to have reached a natural nadir.
                                                                            40                                                                                                                                      6
•   With that said, the volume of new or modern space on the                                                                                                                                                        4
    market has been gradually increasing over the past five years,           20
                                                                                                                                                                                                                    2
    and there is now over 15 million sq ft of new or modern space
                                                                             0                                                                                                                                      0
    available – the highest volume since 2010.

                                                                                     2007

                                                                                             2008

                                                                                                        2009

                                                                                                                      2010

                                                                                                                                    2011

                                                                                                                                            2012

                                                                                                                                                   2013

                                                                                                                                                             2014

                                                                                                                                                                           2015

                                                                                                                                                                                         2016

                                                                                                                                                                                                  2017

                                                                                                                                                                                                         2018
•   In contrast, the volume of secondhand space has been
    declining over this time period, as occupiers taking new space                   New or modern                                                         Availability rate (RHS)
    have not been returning unwanted space back to the market.                       Secondhand

    Warehouses continue to be occupied to maximum efficiency
    in the UK and letting activity on new buildings has largely been
    as a result of expansionary activities rather than consolidation.
    On average, over the past five years, secondhand stock has              Availability rates by building quality, 2009-2018
    accounted for 75% of available space on the market. In 2018            Source: Gerald Eve
    secondhand space accounted for just 63% of available space.
                                                                                 %
•   7.3 million sq ft of speculative space is currently under               26
                                                                            24
    construction and expected to complete in 2019, with the
                                                                            22
    largest volumes in Merseyside & Cheshire, Oxfordshire and               20
    the Northern East Midlands. Whilst we expect there to be                18
    strong occupier interest in speculative developments, it seems          16
    likely that some of this space will enter our availability figures       14
                                                                            12
    throughout 2019, and perhaps drive up new and modern
                                                                            10
    availability rates further.                                              8
                                                                             6
•   At the end of 2018, there were five Gerald Eve regions with overall
                                                                             4
    availability rates over 10%. Locations such as Oxfordshire and           2
    Avon & Somerset recorded the highest availability rates of all our       0
                                                                                     2009

                                                                                                 2010

                                                                                                               2011

                                                                                                                             2012

                                                                                                                                           2013

                                                                                                                                                    2014

                                                                                                                                                                    2015

                                                                                                                                                                                  2016

                                                                                                                                                                                                2017

                                                                                                                                                                                                         2018
    regions at 13.6% and 11.4%. Even though these markets had
    an above average rate of availability at the end of 2018, for the
    majority, this is due to some long standing secondhand buildings,                New or modern                                                         All quantities
    or, rates are driven from a low absolute volume of stock. In the                 Secondhand

    majority of regions which had above average availability rates, the
    new or modern availability rate was often a lot lower.
•   At the other end of the spectrum, there are several markets with       Indexed supply and demand, Q2 2007-Q4 2018
    extremely limited supply. London South and Surrey & Hampshire          Source: Gerald Eve
    recorded 0% availability rateS at the end of 2018, which reflects
                                                                                 Index Q2 2007 = 100
    the high levels of demand in these regions, as well as the             160
    restricted levels of stock and land available for development.         150

•   With strong levels of occupier activity in 2018 and a drop             140
    in development completions, the availability rate across our           130
    regions has remained low. We continue to see a supply                  120
    response from developers, with several speculative schemes             110
    now underway, but levels of demand continue to outpace                 100
    supply on a rolling annual basis.                                       90

•   We expect availability will continue to remain low in the short term    80
    and for the proportion of new or refurbished space to continue          70
    to rise as new developments enter our supply figures. The longer         60
                                                                                     Q2’07
                                                                                     Q4’07
                                                                                     Q2’08
                                                                                     Q4’08
                                                                                     Q2’09
                                                                                     Q4’09
                                                                                     Q2’10
                                                                                     Q4’10
                                                                                     Q2’11
                                                                                     Q4’11
                                                                                     Q2’12
                                                                                     Q4’12
                                                                                     Q2’13
                                                                                     Q4’13
                                                                                     Q2’14
                                                                                     Q4’14
                                                                                     Q2’15
                                                                                     Q4’15
                                                                                     Q2’16
                                                                                     Q4’16
                                                                                     Q2’17
                                                                                     Q4’17
                                                                                     Q2’18
                                                                                     Q4’18

    term outlook for availability not only depends on the appetite for
    further speculative development, but also the predicted volume
    of secondhand space that could be returned to the market as a                    Availability
    result of any malaise in the manufacturing sector.                               Rolling four quarter total take-up

www.geraldeve.com
Availability rates by Gerald Eve region, Q4 2018
Source: Gerald Eve

Oxfordshire

Avon & Somerset

London West

Buckinghamshire & Bedfordshire

South Coast

Merseyside & Cheshire

Greater Manchester

Southern West Midlands

Scottish Central Belt

Northern East Midlands

South Wales

Suffolk & Essex

London North

Northern West Midlands

West Yorkshire

Southern East Midlands

Humberside

Berkshire & Wiltshire

South Yorkshire

London East

Cambridgeshire

North East

Gloucestershire & Worcestershire

Kent

London South

Surrey & Hampshire

0             2          4         6       8   10   12   14

                                       %
    UK average

                                                              15
DEVELOPMENT

•        After four consecutive years of growth in the volume of annual
         development completions, we recorded a substantial 41% drop in
         2018 to 15.8 million sq ft. Whilst the overall volumes were down,
         proportionately, the percentage of speculative space completing
         development was the largest since 2008, at 57% of all completions.
•        For the past decade, development volumes have been driven
         by purpose-build schemes. In contrast, however, 2018 has
         seen the volume of speculative developments reaching practical
         completion surpass the volume of purpose-built development.
         We recorded speculative development from a range of
         developers, with db Symmetry, First Panattoni, Mountpark,
         Prologis, and Segro all particularly active in the speculative
         development market in 2018.
•        We recorded a total of 71 speculative buildings reach practical
         completion during 2018, totalling almost 9 million sq ft, the
         average unit size of which was 130,000 sq ft. This is a significant
         rise on the 46 speculative buildings we saw complete in 2017
         and representative of the increased confidence of developers in
         the UK speculative market.
•        There were just 47 purpose-build completions in 2018, the total
         volume of which was over 13 million sq ft less than the total
         recorded in 2017. Rather than any slowdown in activity, this is
         more a reflection of the longer time period of development for
         larger buildings which has pushed the completion date of some
         of the larger developments into 2019.
•        In terms of average building size, purpose-builds were only slightly
         larger than speculative units in 2018, measuring 146,000 sq ft on
         average, compared to 130,000 sq ft. The largest speculative units
         to complete in 2018 were Wolverhampton 450 (448,000 sq ft) and
         375 Logistics North (375,000 sq ft) both of which were developed by
         First Panattoni. The largest purpose-build development completion
         was H&M’s 750,000 sq ft unit at Magna Park in Milton Keynes.
•        In 2017 development completions were driven by units over
         500,000 sq ft; however in 2018 just one unit completed over
         500,000 sq ft in size. It was the completion of units between
         100,000 and 150,000 sq ft and, 250,000 and 500,000 sq ft,
         rather than the mega sheds, which drove the volume of
         overall completions in 2018, for both purpose-built and
         speculative buildings.

Development completions, by type, 2007-2018
Source: Gerald Eve

          Million sq ft
    35

    30

    25

    20

    15

    10

     5

     0
              2007

                      2008

                              2009

                                     2010

                                            2011

                                                   2012

                                                          2013

                                                                 2014

                                                                        2015

                                                                               2016

                                                                                      2017

                                                                                             2018

              Purpose built
                                                                                                    Tritax forward-funded the development of this 1.5 million sq ft fulfilment
              Speculative
                                                                                                    centre located at Link 66 in Darlington. Upon practical completion in
                                                                                                    September 2019, the cross-dock facility which has an eaves height of
                                                                                                    18 metres, will be let to Amazon on a new 20 year lease.

www.geraldeve.com
•    This in turn has driven down the average size of development                                       Development completions by unit size band and average
     completions to 136,500 sq ft, the lowest on record.                                                unit size, 2007-2018
                                                                                                        Source: Gerald Eve
•    Developers are proving more confident in commencing schemes
     speculatively, and we continue to record heightened speculative                                           Million sq ft                                                                        ‘000 sq ft
     activity from a range of developers. Whilst this has to date been                                   35                                                                                                      300
     largely well thought through and targeted development, the average
                                                                                                         30                                                                                                      250
     size of scheme has started to creep up over the last two years as
     developers have moved up the risk curve.                                                            25
                                                                                                                                                                                                                 200
•    This is borne out in the development starts recorded in 2018,                                       20
     with over 12 million sq ft of speculative space getting underway                                                                                                                                            150
                                                                                                         15
     during the year. This drove the total development starts to almost
                                                                                                                                                                                                                 100
     25 million sq ft, the largest volume of space to start in one year                                  10
     since 2007, with an even 50% split between purpose-built and
                                                                                                          5                                                                                                      50
     speculative developments.
•    Such an even split bodes well in terms of market regulation over                                     0                                                                                                      0

                                                                                                                   2007

                                                                                                                           2008

                                                                                                                                   2009

                                                                                                                                          2010

                                                                                                                                                 2011

                                                                                                                                                        2012

                                                                                                                                                               2013

                                                                                                                                                                        2014

                                                                                                                                                                               2015

                                                                                                                                                                                      2016

                                                                                                                                                                                             2017

                                                                                                                                                                                                       2018
     the next few years. Development completions are expected to
     increase year-on-year, but a fairly even split between tenant-lead
                                                                                                                   500,000 sq ft +                                    250-500,000 sq ft
     and speculative space is expected.
                                                                                                                   100-150,000 sq ft                                  50-100,000 sq ft
•    When indexed back to Q4 2007, on a rolling annual basis,                                                      150-250,000 sq ft                                  Average unit size (RHS)

     the volume of speculative space starting construction has
     surpassed the position in 2007. On a rolling annual basis, there
                                                                                                        Indexed rolling four quarter development starts by type,
     is now more space starting construction speculatively than in
                                                                                                        Q4 2007-Q4 2018
     2007. However, we are in a new paradigm in terms of elevated
                                                                                                        Source: Gerald Eve
     demand. And, supply is a lot lower than it was in 2007. So, whilst
     there are parallels in terms of the cumulative volume of space                                            Index Q4 2007 = 100
     being developed speculatively, current market conditions are                                        300
     very different to 2007 and regionally, these speculative schemes                                    200
     are in much more established markets.
                                                                                                         100
•    To emphasis this, the volume of purpose-built starts is now
                                                                                                          0
     more than double the activity recorded in 2007, a clear sign of
     occupier demand for new space.                                                                     -100

                                                                                                        -200
•    The drop in development completions recorded in 2018
     was slightly surprising, but we predict that the volume of                                         -300
     completions will increase substantially in 2019. At the end of
                                                                                                        -400
     2018, we recorded just over 20 million sq ft of space under
     construction and due to complete in 2019, 7.3 million sq ft of                                     -500
                                                                                                                    Q4’07
                                                                                                                    Q2’08
                                                                                                                    Q4’08
                                                                                                                    Q2’09
                                                                                                                    Q4’09
                                                                                                                    Q2’10
                                                                                                                    Q4’10
                                                                                                                    Q2’11
                                                                                                                    Q4’11
                                                                                                                    Q2’12
                                                                                                                    Q4’12
                                                                                                                    Q2’13
                                                                                                                    Q4’13
                                                                                                                    Q2’14
                                                                                                                    Q4’14
                                                                                                                    Q2’15
                                                                                                                    Q4’15
                                                                                                                    Q2’16
                                                                                                                    Q4’16
                                                                                                                    Q2’17
                                                                                                                    Q4’17
                                                                                                                    Q2’18
                                                                                                                    Q4’18

     which is speculative.

                                                                                                                   Purpose built
                                                                                                                   Speculative

Development starts, by type, 2006-2018
Source: Gerald Eve

         Million sq ft
    30

    25

    20

    15

    10

     5

     0
             2006

                    2007

                           2008

                                  2009

                                         2010

                                                2011

                                                       2012

                                                              2013

                                                                     2014

                                                                            2015

                                                                                   2016

                                                                                          2017

                                                                                                 2018

             New purpose built
             Speculative

                                                                                                                                                                                                                     17
•    This will provide occupiers with an increased choice of new                                            •   The proximity of certain developments to up-and-built large
     space in 2019 and with an average building size across the UK                                              warehouses already let to high profile occupiers is another
     of 138,000 sq ft, these buildings are likely to be well received by                                        factor developers are considering before speculating in the UK.
     occupiers. However, there are certain regions where there are a                                            Occupiers are increasingly concerned about having a steady
     number of speculative buildings expected to complete in 2019,                                              supply of appropriately skilled labour to staff warehouses, and
     and depending on the timings of the completions, this could                                                the proximity of a speculative development to an existing large
     have a dampening effect on rental growth in these regions if                                               warehouse, which may have already attracted a large amount
     occupiers have increased choice. London North and Oxfordshire                                              of the labour pool of potential new occupiers, could be a limiting
     have a number of speculative developments expected in 2019.                                                factor on occupier demand for these buildings. Given the
                                                                                                                potential threats to demand over the next few years, we expect
•    The impact of additional speculative developments in larger
                                                                                                                developers to continue to closely analyse the nuances of supply
     markets such as the North West, Midlands and Yorkshire is likely
                                                                                                                and demand before starting schemes.
     to be more supportive of prime rental growth, given the historic
     demand profile in these regions and the fact that speculative
     developments in these regions are more geographically disparate.

Development completions, by type and 2019 outlook,                                                          2019 expected speculative development completions by
2007-2019                                                                                                   broad region
Sources: Gerald Eve                                                                                         Source: Gerald Eve

         Million sq ft                                                                                                                                                            3%
    35
                                                                                                            15%                                               West of England & Wales
                                                                                                            West Midlands
    30                                                                                                                                                                          19%
                                                                                                 Forecast

                                                                                                                                                                  South East England
    25

    20

    15

    10
                                                                                                            22%
                                                                                                            East Midlands                  7.3
                                                                                                                                         million sq ft
     5                                                                                                                                                                          29%
                                                                                                                                                                    Northern England
     0
             2007

                    2008

                           2009

                                  2010

                                         2011

                                                2012

                                                       2013

                                                              2014

                                                                     2015

                                                                            2016

                                                                                   2017

                                                                                          2018

                                                                                                 2019

                                                                                                            12%
                                                                                                            London

             Purpose built
             Speculative

www.geraldeve.com
RENTS AND INCENTIVES

•   The combination of a historically low level of availability and        •        Throughout 2018 there has been a significant rise in the volume
    above average levels of occupier demand has resulted in further                 of units being developed speculatively, and we expect this trend
    positive rental growth in the UK logistics market during 2018.                  to continue throughout 2019, with a large volume of speculative
                                                                                    space currently under construction. This influx of new space
•   After prime rental growth lost momentum following the
                                                                                    is likely to drive rents in several supply-starved markets, but in
    recession, the market has certainly recovered and rents
                                                                                    others, it could offer an increased choice to occupiers which
    have continued to grow year-on-year. The UK logistics rental
                                                                                    could in turn increase competition and suppress rental growth.
    market has continued to perform strongly against an uncertain
    economic backdrop.                                                     •        It is worth bearing in mind that occupiers remain under cost
                                                                                    pressures to be able to afford to pay ever-rising rents which could
•   In line with our forecasts made at the start of the year, UK prime
                                                                                    increasingly become an issue in the medium term, especially if
    logistics rents have grown by an average 3.6% during 2018.
                                                                                    Brexit-related issues affect underlying business conditions.
    Whilst down on the 6.8% recorded in 2017, the All UK average
    figure is now £7.39, the highest on record, and prime rents in
    several markets are well in advance of previous highs.
                                                                           Indexed regional prime rental growth, Q4 2012-Q4 2018
•   We recorded over 10% prime rental growth in four of our                Source: Gerald Eve
    regions during 2018; the North East, Cambridgeshire,
    Southern East Midlands, and Oxfordshire. For the most part                       Index Q4 2012 = 100
                                                                           135
    these regions are characterised as having a restricted volume
    of supply, strong levels of occupier demand, and significant            130
    volumes of new development space, on which new prime
                                                                           125
    rents could be achieved.
                                                                           120
•   Since the start of 2018, we have recorded the strongest
    growth in prime rents in individual centres such as Enfield,            115
    Peterborough, West Thurrock and Heathrow – locations which
                                                                           110
    are both prime and command a premium, or, those with low
    supply and which have seen speculative schemes attract                 105
    elevated rents.
                                                                           100
                                                                                        Q4’12

                                                                                                Q2’13

                                                                                                         Q4’13

                                                                                                                   Q2’14

                                                                                                                              Q4’14

                                                                                                                                             Q2’15

                                                                                                                                                            Q4’15

                                                                                                                                                                           Q2’16

                                                                                                                                                                                          Q4’16

                                                                                                                                                                                                     Q2’17

                                                                                                                                                                                                               Q4’17

                                                                                                                                                                                                                        Q2’18

                                                                                                                                                                                                                                Q4’18
•   The continued low levels of supply in several markets has
    meant that certain speculative schemes that are currently being
    developed are quoting rental profiles in excess of our recorded                      London                                                                                 West of England & Wales
    prime rent series. Deals on such schemes are likely to continue                     Northern England                                                                       South East England
    to drive prime rents on in early 2019 as landlords on newly                         West Midlands                                                                          Scotland
    developed buildings seek the highest rents for the location.                        East Midlands

•   In contrast, some Gerald Eve centres have not experienced
    such positive movements in rents, and we have recorded a
    flat rental profile in seven centres in 2018. For several centres,       Indexed average UK prime headline rent, 2005-2018
    such as London South and Surrey & Hampshire, rental growth             Source: Gerald Eve
    has been restricted by the demand and supply imbalance.
                                                                                     Index 2005 = 100
    Low volumes of stock, limited development and below average            125
    availability rates has restricted occupier activity and limited deal   120
    evidence to move the rental profiles.
                                                                           115
•   In 2018, in conjunction with positive prime rental growth, tenant      110
    incentives also remained low, with the average level of incentives
                                                                           105
    offered on a ten year lease remaining at 7-11 months’ rent free
                                                                           100
    on average across the UK.
                                                                               95
•   Current rent free incentives offered to occupiers are far lower
                                                                               90
    than average rent free periods offered at the end of 2012, which
    used to be 14-20 months’ rent free. Incentives have remained               85

    at a similar level since the end of 2015, and we seemed to have            80
                                                                                        2005

                                                                                                2006

                                                                                                        2007

                                                                                                                 2008

                                                                                                                           2009

                                                                                                                                      2010

                                                                                                                                                     2011

                                                                                                                                                                    2012

                                                                                                                                                                                   2013

                                                                                                                                                                                              2014

                                                                                                                                                                                                        2015

                                                                                                                                                                                                                 2016

                                                                                                                                                                                                                         2017

                                                                                                                                                                                                                                2018

    reached the low point in terms of occupier inducements.

            In line with our forecasts made at the start of the year, UK prime logistics
            rents have grown by an average 3.6% during 2018.

                                                                                                                                                                                                                                        19
INVESTMENT

•        2018 was another exceptional year for industrial property                                                       2018 investment volumes by property type and Gerald Eve region
         investment, both in terms of volumes traded and overall                                                         Sources: Property Data, Gerald Eve
         performance. The current occupier market conditions of
         constrained supply and strong demand plus a reduced, but
         still positive outlook for rental growth, has meant the logistics                                               London North
         sector has been subject to a great deal of attention from
         investors in 2018.                                                                                              Southern West Midlands

•        With the current political uncertainties, the sector has offered
                                                                                                                         Southern East Midlands
         investors the potential for stable, income-producing assets, in a
         market that is expected to continue to grow.
                                                                                                                         London East
•        In 2018 we recorded the third largest volume of industrial
         property investment on record, with strong levels of interest                                                   Merseyside & Cheshire
         in industrial portfolios, standard industrials and distribution
         warehouses. Excluding portfolios from the total volume                                                          North East
         transacted, the volume of standard industrials and distribution
         warehouses is marginally below the record-breaking levels                                                       Berkshire & Wiltshire
         recorded in 2017, at £5.4 billion.
                                                                                                                         Scottish Central Belt
•        On average, across the country, we recorded a 22 basis point
         reduction in prime yields throughout 2018. Some locations,
                                                                                                                         Surrey & Hampshire
         such as Heathrow and Park Royal achieved record low prime
         yields of 3.75% and 3.5% at the end of 2018. Nearly every
                                                                                                                         Northern East Midlands
         Gerald Eve centre now has a yield profile below that recorded
         in Q4 2007.
                                                                                                                         West Yorkshire
•        In 2018, it was London North which recorded the highest volume
         of industrial investment – driven by the purchase of trading                                                    London West
         estates such as Woodside and Martinbridge. The Southern
         West Midlands was also a target for investors in 2018, as                                                       South Coast
         several large transactions concluded, such as Kings Norton
         Industrial Estate in Birmingham, which traded at £134 million,                                                  South Yorkshire
         reflecting a 4.03% yield.
                                                                                                                         Greater Manchester
•        In terms of distribution warehouse investment, London East
         and Merseyside & Cheshire were the focus of investor attention,
                                                                                                                         Buckinghamshire & Bedfordshire
         recording the highest number of transactions on distribution
         warehouses. In terms of volumes, we saw a significant amount
                                                                                                                         Oxfordshire
         traded in the North East and the Southern East Midlands in
         distribution warehouses in 2018.
                                                                                                                         Avon & Somerset

                                                                                                                         Northern West Midlands
Annual industrial investment volumes including portfolios and
Heathrow prime yield, 2005-2018                                                                                          Gloucestershire & Worcestershire
Sources: Property Data, Gerald Eve
                                                                                                                         Kent
          £ billion                                                                                              %
    12                                                                                                               8
                                                                                                                         London South
                                                                                                                     7
    10
                                                                                                                     6   Cambridgeshire
     8
                                                                                                                     5
                                                                                                                         Humberside
     6                                                                                                               4

                                                                                                                     3   Suffolk & Essex
     4
                                                                                                                     2
                                                                                                                         South Wales
     2
                                                                                                                     1

     0                                                                                                               0
              2005

                      2006

                             2007

                                    2008

                                           2009

                                                  2010

                                                         2011

                                                                2012

                                                                       2013

                                                                              2014

                                                                                     2015

                                                                                            2016

                                                                                                   2017

                                                                                                          2018

                                                                                                                         0             100            200     300       400   500     600
                                                                                                                                                            £ million

              Distribution warehouse                                   Portfolio                                             Standard industrial
              Industrial                                               Heathrow prime yield (RHS)                            Distribution warehouse

www.geraldeve.com
Gerald Eve advised Deutsche Bank on the sale of Unit B,
                                                                                                                       New Hythe Lane in Aylesford for £27.5 million in 2018.

•         Property companies were on balance significant net sellers
          during 2018, whilst UK institutions and overseas investors
          were the most acquisitive purchasers of distribution
          warehouses on a net basis.
•         The most acquisitive investors in 2018 were Tritax Big Box REIT,
          Ascendas REIT and M7 Real Estate, who together invested
          over £1.3 billion, over 32% of the total volume of transactions
          recorded for distribution warehouses.
•         We also saw several high value development acquisitions
          during 2018; including Citrus Group’s sale of Integra 61 in
          Durham to Tritax, for £147.3 million. The 1.9 million sq ft unit
          has been pre-let to Amazon and is set to be their second
          largest warehouse in the UK. It is also expected to benefit
          from significant capital investment from the occupier.
•         Industrial property has once again delivered one of the best set
          of investment performance results of all asset classes in 2018,
          outperforming retail, office, residential, hotel and other sectors in
          terms of 12 month total returns.

Distribution warehouse net investment by investor type 2018
Sources: Property Data, Gerald Eve

           £ Million
800

600

400

200

     0

-200

-400

-600

-800
                UK            Overseas               Private         Occupier            Undisclosed       Property
           institutions       investors            individuals                                            companies

Annual distribution warehouse total return and components,
2005-2018
Sources: MSCI, Gerald Eve

           % per year
    30

    20

    10

     0

    -10

    -20

    -30
                2005

                       2006

                              2007

                                     2008

                                            2009

                                                      2010

                                                             2011

                                                                    2012

                                                                           2013

                                                                                  2014

                                                                                           2015

                                                                                                  2016

                                                                                                         2017

                                                                                                                2018

               Income return                                               Market rental value growth
               Equivalent yield impact                                     Total return

                                                                                                                                                                                 21
Annual UK retail, office and distribution warehouse equivalent                                                                               Distribution warehouse equivalent yield, ten year government
yields, 2001-2018                                                                                                                           bond and spread 2005-2018
Sources: MSCI, Gerald Eve                                                                                                                   Sources: Oxford Economics, Gerald Eve

          %                                                                                                                                           %
    9.0                                                                                                                                         10
    8.5                                                                                                                                          9
    8.0                                                                                                                                          8
    7.5                                                                                                                                          7
    7.0                                                                                                                                          6
    6.5                                                                                                                                          5
    6.0                                                                                                                                          4
    5.5                                                                                                                                          3
    5.0                                                                                                                                          2
    4.5                                                                                                                                          1
    4.0                                                                                                                                          0

                                                                                                                                                          2005

                                                                                                                                                                 2006

                                                                                                                                                                        2007

                                                                                                                                                                               2008

                                                                                                                                                                                      2009

                                                                                                                                                                                             2010

                                                                                                                                                                                                    2011

                                                                                                                                                                                                           2012

                                                                                                                                                                                                                  2013

                                                                                                                                                                                                                         2014

                                                                                                                                                                                                                                2015

                                                                                                                                                                                                                                       2016

                                                                                                                                                                                                                                              2017

                                                                                                                                                                                                                                                     2018
              2001
                     2002
                            2003
                                   2004
                                          2005
                                                 2006
                                                        2007
                                                               2008
                                                                      2009
                                                                             2010
                                                                                    2011
                                                                                           2012
                                                                                                  2013
                                                                                                         2014
                                                                                                                2015
                                                                                                                       2016
                                                                                                                              2017
                                                                                                                                     2018

              Distribution warehouse                                                                                                                      Gap
              All office                                                                                                                                   Government bonds
              All retail                                                                                                                                  Distribution warehouse equivalent yields

•     UK distribution warehouse equivalent yields fell below that being                                                                     •        The reliable income component of warehouse investment
      achieved by UK offices and retail in 2018. This is reflective of                                                                                 performance will hold it in good stead as we go through times
      the structural change we are seeing in the UK logistics sector                                                                                 of potentially significant political and economic uncertainty over
      and the changing nature of consumerism, with increasing levels                                                                                 the next few years. Whilst we expect the health of the occupier
      of online shopping and reduced high street activity. This is now                                                                               market to continue, there are competing pressures on the ability
      clearly filtering through into the investment performance of these                                                                              of investors to pay the yields currently being achieved, especially
      buildings given the strong investor sentiment for the sector.                                                                                  against the current uncertain economic backdrop.
•     With this said, in terms of performance, total returns for distribution                                                               •        Despite record low yields, logistics (together with multi-let
      warehouses marginally dropped by 3.5%, from 17% in 2017 to                                                                                     industrial) is forecast to outperform the rest of the UK real estate
      13.5% in 2018, with a slow down in performance in the second                                                                                   market in terms of total returns in the short and medium terms.
      half of 2018. While we saw very little change to rental growth and                                                                             The best quality logistics properties still offer the opportunity to
      income return compared to 2017, the drop was mainly driven by                                                                                  attract very strong tenants on long, often index-linked leases.
      less positive equivalent yield impact which dropped by 3.4%, from
                                                                                                                                            •        These ‘long and strong’ opportunities (in any real estate sector,
      8.6% in 2017 to 5.1% to 2018.
                                                                                                                                                     but especially industrial) currently have the greatest depth of
•     The significant levels of yield compression we have recorded                                                                                    interest as some investors seek to reduce their risk exposure in
      over the past few years has meant that many investors now                                                                                      the late run cycle. Arguably, long-let logistics is one of the most
      consider the industrial sector too keenly priced. Therefore,                                                                                   defensive sub-sectors of the UK real estate market moving
      certain investors are now turning to secondary logistics and                                                                                   forwards and the weight of capital should continue to maintain
      vacant sites, where they believe there is more potential and                                                                                   pricing in the short term, even as other sectors potentially
      value in the current market.                                                                                                                   begin to fall.
•     With that said, even with falling yields, compared to ten-year
      Government bonds, distribution warehouse yields still offer an
      attractive spread of around 4%. To the footloose investor, there
      is still margin to be had from the sector.
•     We expect the total return profile to return to more ‘normal’
      levels over the next five years. The outlook for capital values
      is likely to be driven more by the impact of reduced, but still
      positive rental growth, rather than further positive yield impact.                                                                                                                                      Nick Ogden
      With yields as low as they are, whilst it is feasible the current                                                                                                                                       Capital Markets
      level of investor activity could continue, it is unlikely that                                                                                                                                          Tel. +44 (0)20 3486 3469
      movements in yields are going to have the same impact on                                                                                                                                                Mobile +44 (07825 106681
      values as they did in 2017 and 2018.                                                                                                                                                                    nogden@geraldeve.com

www.geraldeve.com
OUTLOOK

•   2018 turned out to be another very strong year for UK             Distribution warehouse annual total return and components,
    logistics, both occupationally and in the investment market.      Q4 2013-Q4 2018
    This strong showing is despite the unusual economic and           Sources: MSCI, Gerald Eve
    political environment in which the UK finds itself in and the
    weak sales figures of several high street retailers.                      % annual growth
                                                                       25
•   The headlines for the year involved strong occupier demand,
                                                                       20
    continued weak supply, despite a substantial increase in
    speculative development starts, and, continued growth in rents.
                                                                       15
    This in turn fuelled the investment market and it was another
    stellar year in terms of total returns for the asset class.        10

•   However, towards the end of 2018 we did start to see a
                                                                        5
    slowdown in terms of quarterly performance. On a quarterly
    basis, annual total returns for distribution warehouses, whilst
                                                                        0
    still one of the best performing of all commercial property
    asset classes in 2018, did fall off in the second half of the       -5

                                                                                 Q4’13
                                                                                         Q1’14
                                                                                                 Q2’14
                                                                                                          Q3’14
                                                                                                                  Q4’14
                                                                                                                            Q1’15
                                                                                                                                     Q2’15
                                                                                                                                             Q3’15
                                                                                                                                                     Q4’15
                                                                                                                                                             Q1’16
                                                                                                                                                                       Q2’16
                                                                                                                                                                               Q3’16
                                                                                                                                                                                        Q4’16
                                                                                                                                                                                                Q1’17
                                                                                                                                                                                                        Q2’17
                                                                                                                                                                                                                Q3’17
                                                                                                                                                                                                                         Q4’17
                                                                                                                                                                                                                                 Q1’18
                                                                                                                                                                                                                                           Q2’18
                                                                                                                                                                                                                                                    Q3’18
                                                                                                                                                                                                                                                            Q4’18
    year. Rental growth and income return remained steady
    throughout 2018, but the impact of positive yield impact on
    the total return profile of warehouses started to reduce.
                                                                                Income return                                                                                            Market rental growth
•   Allied to this, 2019 also began with a flurry of negative                    Equivalent yield impact                                                                                  Total return

    economic data. Oxford Economics lowered their GDP growth
    forecasts for 2019 to 1.4% from 1.7%, reflecting the run of
                                                                      UK business investment, contributions to GDP growth,
    weak data and slowdown in world trade. The economy is
                                                                      2006-2023
    shrouded in a Brexit fog, the uncertainty of which is weighing
                                                                      Sources: Oxford Economics
    heavily on business investment, and is likely to continue to do
    so in the short term. We are now starting to see the impact              % per year
    of the UK’s decision to leave the EU reflected in performance       10

    data on the real economy.
                                                                                                                                                                                                                                   Forecast
                                                                        5
•   Firms are in solid financial shape, but they have been reluctant
    to spend, and we have seen business investment fall each
                                                                        0
    quarter in 2018. This is expected to be a drag on GDP growth
    over the next five years.
                                                                        -5

                                                                       -10

                                                                       -15
                                                                                2006
                                                                                         2007
                                                                                                   2008
                                                                                                              2009
                                                                                                                          2010
                                                                                                                                    2011
                                                                                                                                             2012
                                                                                                                                                      2013
                                                                                                                                                                2014
                                                                                                                                                                           2015
                                                                                                                                                                                       2016
                                                                                                                                                                                                2017
                                                                                                                                                                                                        2018
                                                                                                                                                                                                                  2019
                                                                                                                                                                                                                            2020
                                                                                                                                                                                                                                         2021
                                                                                                                                                                                                                                                   2022
                                                                                                                                                                                                                                                            2023

                                                                                                                                                                                                                                                                    23
•   Should we experience a disorderly Brexit, we would expect
                                                                       some major short term disruption to both the economy and
      Liberty 163 is a speculative development at Stoford              equity markets. Commercial real estate, already late in a market
      Developments’ Worcester Six scheme, which has attracted          cycle, is not going to avoid these negative impacts, but the
      occupiers such as Kimal, Kohler Mira and Spire Healthcare.       logistics sector is far less vulnerable than both the office and
                                                                       retail sectors.
                                                                   •   One of the reasons for this expected resilience is the structural
                                                                       shift we have seen in the occupier market. Online sales as
                                                                       a proportion of total retail sales hit 20% in December 2018
                                                                       and spending online grew by 14% in 2018. Dedicated online
                                                                       retailers and high street retailers tethered to a long chain of
                                                                       outdated high street shops are going to continue to invest in
                                                                       their distribution networks. As will the dependant logistics firms
                                                                       servicing contracts for these occupiers.
                                                                   •   Given the high levels of space under offer at the end of 2018,
                                                                       and the general elevated levels of requirements in the market, we
                                                                       expect that it will again be retailers and their desire for new space,
                                                                       which will continue to drive demand in 2019. The structural shift
                                                                       of consumer shopping patterns to the internet and the critical
                                                                       importance of an effective supply chain to retailers are expected
                                                                       to filter through into demand for industrial property in 2019.
                                                                   •   However, over a five year forecast horizon, there are both
                                                                       structural and cyclical forces at work which could have an impact
                                                                       on levels of demand – not least the potential impact of Brexit in
                                                                       2019, which is likely to hasten any cyclical market movements.
                                                                       It is the impact on the manufacturing sector and the knock-on
                                                                       effect to overall demand for industrial space from this occupier
                                                                       sector which is likely to have a dampening effect on demand.
                                                                   •   Whilst we are likely to see supply increase throughout 2019
                                                                       through a combination of the addition of new speculative
                                                                       space and the return of secondhand space, we expect
                                                                       demand will remain robust enough to keep upward pressure
                                                                       on prime rents, albeit not at the same growth rates recorded
                                                                       over the last few years.
                                                                   •   Our baseline forecast for prime rents over the next five years is for
                                                                       a UK average 1.2% growth per year, with the strongest growth in
                                                                       rents, of 1.4%, expected in 2021. Since the end of 2014, average
                                                                       UK prime rents have grown by 24%. This is significant growth
                                                                       for a sector not historically known for its strong levels of rental
                                                                       growth. Whilst there is the potential for a bounce in occupier
                                                                       activity at the end of any Brexit transition period, there are
                                                                       competing pressures at work over such a long forecast period,
                                                                       not least the cost pressures on occupiers to be able to afford
                                                                       further increases in rents.
                                                                   •   However, even with these pressures, we forecast that the
                                                                       structural change we have seen in the market will translate into
                                                                       all regions experiencing positive rental growth over the next five
                                                                       years. In the current broader commercial property environment
                                                                       and the likely economic uncertainty the UK is going to experience
                                                                       over the next few years, this in itself is a positive for the sector
                                                                       and one which is not replicated in other commercial property
                                                                       asset classes.

www.geraldeve.com
UK average prime headline rental growth and forecast,                                                                                                         Annual development completions, by type and forecast based on
2013-2023                                                                                                                                                     space under construction at the end 2018 to be delivered in 2019
Source: Gerald Eve                                                                                                                                            Source: Gerald Eve

      % per year                                                                                                                                                       %
  8                                                                                                                                                            100

  7                                                                                                                                                               90
                                                                                                                                                                  80
  6
                                                                                                                                                                  70
  5                                                                                                                                                               60
                                                                                                                    Forecast
  4                                                                                                                                                               50

  3                                                                                                                                                               40
                                                                                                                                                                  30
  2
                                                                                                                                                                  20
  1                                                                                                                                                               10
  0                                                                                                                                                                0
         2013

                       2014

                                     2015

                                                   2016

                                                                 2017

                                                                               2018

                                                                                             2019

                                                                                                           2020

                                                                                                                         2021

                                                                                                                                         2022

                                                                                                                                                       2023

                                                                                                                                                                           2007

                                                                                                                                                                                  2008

                                                                                                                                                                                         2009

                                                                                                                                                                                                2010

                                                                                                                                                                                                       2011

                                                                                                                                                                                                              2012

                                                                                                                                                                                                                     2013

                                                                                                                                                                                                                            2014

                                                                                                                                                                                                                                   2015

                                                                                                                                                                                                                                                               2019
                                                                                                                                                                                                                                          2016

                                                                                                                                                                                                                                                 2017

                                                                                                                                                                                                                                                        2018
                                                                                                                                                                           Purpose-built
                                                                                                                                                                           Speculative

All retail sales and internet retail sales value growth, 2008-2023                                                                                            •    Whilst in prime markets the forces of supply and demand
Sources: ONS, Oxford Economics                                                                                                                                     could push rents on, especially in those locations where there
                                                                                                                                                                   is an acute shortage of supply and land for future development
160
      Index 2016 = 100                                                                                                                                             such as London West and Cambridgeshire. There are
                                                                                                                                Forecast                           other markets, where the costs pressures on occupiers are
140                                                                                                                                                                more acutely felt and whilst rents need to increase to make
120                                                                                                                                                                developments viable, occupiers may not be in a position to
                                                                                                                                                                   pay them. In such markets, this could limit both development
100
                                                                                                                                                                   activity and growth in prime rents.
 80
                                                                                                                                                              •    Markets which have already seen step-changes in rents in
 60
                                                                                                                                                                   the current cycle, such as London South, are unlikely to grow
 40                                                                                                                                                                at the same high levels over the next five years, even though
                                                                                                                                                                   upward pressure on rents remains. Those markets which have
 20
                                                                                                                                                                   not seen this significant growth can expect rents to move on
  0                                                                                                                                                                in excess of the UK average. As we enter 2018, based on
         2008

                2009

                              2010

                                     2011

                                            2012

                                                          2013

                                                                 2014

                                                                        2015

                                                                                      2016

                                                                                             2017

                                                                                                    2018

                                                                                                                  2019

                                                                                                                         2020

                                                                                                                                  2021

                                                                                                                                                2022

                                                                                                                                                       2023

                                                                                                                                                                   the amount of space under construction at the end of 2018
                                                                                                                                                                   and due to complete in 2019, we expect, proportionately,
         All retail sales value, excl fuel
                                                                                                                                                                   that at 36% of all expected development completions that
         Internal retail sales value
                                                                                                                                                                   speculative developments will continue to be an important
                                                                                                                                                                   driver of the market.

                                                                                                                                                                                                                                                                      25
•   We are seeing developers move slightly up the risk curve in             Internet sales as a percentage of total retail sales and take-up
    terms of the sizes and locations of speculative developments.           by online retailers as a percentage of total take-up
    This will feed the market with new accommodation; however,              Sources: ONS, Gerald Eve
    the simultaneous delivery of several speculative schemes in
    certain locations could test the depth of occupier demand and                  % per year
                                                                             25
    will certainly have an impact on the rental growth outlook.
•   In the investment market, many investors realise that this is one        20
    of the few sectors that has the real possibility of meaningful
    income return and rental growth. The best quality logistics              15
    properties still offer the opportunity to attract very strong tenants
    on long, often index-linked leases. These ‘long and strong’
                                                                             10
    opportunities have the greatest depth of interest as some
    investors seek to reduce their risk exposure in the late run cycle.
                                                                              5
•   However, it is possible that the yield spread between core and
    core-plus, having shrunk over the last couple of years, could             0

                                                                                      2007

                                                                                              2008

                                                                                                       2009

                                                                                                              2010

                                                                                                                     2011

                                                                                                                            2012

                                                                                                                                   2013

                                                                                                                                            2014

                                                                                                                                                   2015

                                                                                                                                                                            2018
    begin to widen again. Core-plus assets could underperform

                                                                                                                                                            2016

                                                                                                                                                                     2017
    against core counterparts as investors apply a greater risk
    premium to shorter leases and older properties. Whilst the                        Internet sales as a percentage of all retailing
    background economic uncertainty could create some buying                          Linear average (Take-up by online retailers as a percentage of total take-up)
    opportunities, broadly speaking, yields are at levels where                       Take-up by online retailers as a percentage of total take-up
    investors are likely to find it increasingly difficult to gain access
    to the sector at a reasonable entry price.
•   If the UK leaves the European Union without a deal in place,
    there will inevitably be border and international trade disruption      Distribution warehouse forecast total return and components,
    as checks and tariffs cause friction around entry and exit ports.       2012-2023
    Underlying business conditions are likely to be threatened and          Sources: MSCI, Gerald Eve
    occupiers are likely to remain under cost pressures to be able to
                                                                                   % per year
    afford to pay ever-rising rents.                                          25
                                                                                                                                                          Forecast
•   Some industries will be more greatly impacted by a disorderly             20
    UK withdrawal from the EU, and any accompanying exchange
    rate movements, than others. In short, costs are likely to rise for       15

    many businesses, particularly those dealing in overseas trade –           10
    either import or export.
                                                                               5
•   Overseas supply chains are likely to become slower and more
    expensive, and border frictions could have an impact on the UK             0
    food and drink retailers, particularly for just-in-time perishable
                                                                              -5
    goods. Chilled and ambient storage is likely to be in high
    demand, despite underlying business conditions weakening.                -10
                                                                                       2012

                                                                                                2013

                                                                                                       2014

                                                                                                              2015

                                                                                                                     2016

                                                                                                                            2017

                                                                                                                                   2018

                                                                                                                                            2019

                                                                                                                                                   2020

                                                                                                                                                             2021

                                                                                                                                                                     2022

                                                                                                                                                                            2023

•   It is the manufacturing sector which we think could be most at
    risk of a disorderly Brexit. Oxford Economics specifically highlight               Income return                                       Yield impact on capital values
    the chemicals and automotive sectors as being vulnerable,                         Rental growth                                       Total return
    but the construction industry will also come under pressure as
    raw materials like steel and labour become more expensive.
•   In short, there are several downside risks on the horizon, more
    so than in recent years, and this will have an effect on the
    performance of logistics property, just like all other sectors.
    However, the ‘structural’ change we have witnessed in the
    sector is likely to make it more resilient over the five year
    forecast horizon than other sectors.

www.geraldeve.com
Prime headline annual rental growth forecasts by Gerald Eve region

                                                                                         Average regional rental growth 2019-2023
Gerald Eve region                    Gerald Eve centres (included in averages)
                                                                                                                         (per year)

Merseyside & Cheshire                Warrington & Liverpool                                                                   3.0%

Greater Manchester                   Manchester                                                                               2.8%

North East                           Newcastle & Sunderland                                                                   2.7%

Humberside                           Hull                                                                                     2.3%

Berkshire & Wiltshire                Reading & Swindon                                                                        2.1%

West Yorkshire                       Leeds, Bradford & Wakefield                                                               2.0%

Avon & Somerset                      Bristol                                                                                  2.0%

Southern West Midlands               Birmingham, Coventry, Wolverhampton/Black Country                                        1.4%

Buckinghamshire & Bedfordshire       Milton Keynes                                                                            1.4%

Northern East Midlands               Leicester, Nottingham & Derby                                                            1.3%

Northern West Midlands               Stoke/Stafford, Burton upon Trent, Telford                                               1.3%

South Yorkshire                      Sheffield/Doncaster                                                                       1.2%

Southern East Midlands               Northampton                                                                              1.1%

Oxfordshire                          Banbury & Wycombe                                                                        0.9%

South Wales                          Cardiff & Newport                                                                        0.9%

Gloucestershire & Worcestershire     Gloucester                                                                               0.9%

London East                          Basildon & West Thurrock                                                                 0.9%

London South                         Crawley & Croydon                                                                        0.9%

Cambridgeshire                       Peterborough                                                                             0.9%

London North                         Enfield, Hemel Hempstead, Luton                                                           0.8%

London West                          Heathrow, Park Royal & Slough                                                            0.8%

Scottish Central Belt                Glasgow & Edinburgh                                                                      0.7%

Surrey & Hampshire                   Basingstoke                                                                              0.6%

Kent                                 Ashford & Maidstone                                                                      0.5%

South Coast                          Southampton & Portsmouth                                                                 0.3%

Suffolk & Essex                      Colchester & Ipswich                                                                     0.0%

Source: Gerald Eve

                                                                                                                                 27
THE GERALD EVE REGIONS

The following market reports provide you with
in depth analysis of each of our 26 Gerald Eve
regions. We take an individual look at each
region and analyse recent market activity and
the prospects for each market over the next
five years.

www.geraldeve.com
Gerald Eve regions

                                        M90

                     M8
                          M73        SCOTTISH
                                M8   CENTRAL BELT
                     M74

                                        A74

                                                   M6
                                                            NORTH EAST

                                                                        A1

                                                                 WEST             HUMBERSIDE
                                                                 YORKSHIRE         M62

                                                                M62          M1
                                                   M56              SOUTH
                                                         GREATER    YORKSHIRE
                                                         MANCHESTER       A1

                                        MERSEYSIDE
                                        & CHESHIRE

                                                    NORTHERN      NORTHERN EAST
                                                    WEST MIDLANDS MIDLANDS

                                                         SOUTHERN
                                                         WEST MIDLANDS SOUTHERN CAMBRIDGESHIRE
                                                                         EAST MIDLANDS A1       SUFFOLK
                                                                                                & ESSEX
                                                                          BUCKINGHAMSHIRE      A14
                                                   GLOUCESTERSHIRE        & BEDFORDSHIRE M11
                                                   & WORCESTERSHIRE             M1
                                                                     M40
                                                                                LONDON NORTH
                                                          M50
                           SOUTH                                            OXFORDSHIRE
                                                                                               M25

                           WALESM4                                                     LONDON LONDON
                                                                      BERKSHIRE        WEST
                                                   AVON & M4          & WILTSHIRE               EAST
                                                   SOMERSET                               M25
                                                                                              LONDON
                                                                                SURREY &                     KENT
                                                                                HAMPSHIRE M23 SOUTH
                                              M5
                                                                                                       M20
                                                                        SOUTH M3
                                                                        COAST

                                                                                                                    29
AVON & SOMERSET
         Brecon                                                                       Stow-on-t
                                 Ross-on-Wye         Gloucester         Cheltenham

                                                            Cirencester
               Cwmbran

                           Newport                                        Swindon
          Cardiff
                                               Bristol               Chippenham        M4
                                  M5
                                                   Bath
           Weston-super-Mare                                      Trowbridge

                                                    Frome
                                                                   Warminster
                    Bridgwater                Shepton Mallet
                                       Glastonbury
                                                                         Salisbury
          Taunton
                                                                                                        This region is strategically located at the western end of the English stretch
                                          Yeovil                                                        of the M4 and with several motorway links it stands as a gateway to the
                                                                                                        South West, Wales and the Southern West Midlands. Shadowed by strong
er                                          Dorchester
                                                                                                        results in previous years, 2018 in comparison has been subdued in terms
                                                                               B        th              of take-up and development volumes, but interest in the region remains
                                                                                                        strong with several large scale schemes set to start imminently.
                                                     Avon &                     Regional
                                                                                                        The largest occupier deal agreed in the region during 2018 was Apec Braking’s
                                                   Somerset                     Average
                                                                                                        115,000 sq ft letting at Horizon 38 in Bristol, reportedly for £7.25 per sq ft, thereby
                                                                                                        achieving prime rental value for the region. With only five deals recorded last year
Demand                                                                                                  however, 2018 marks the lowest volume of take-up achieved in this region since 2003,
                                                                                                        a poignant result following the two strongest years on record. The levels recorded in
     Take-up (2018)                                    0.43                         1.94
                                                     m sq ft                       m sq ft              2016 and 2017 were driven by two significant deals by The Range (1.2 million sq ft) and
                                                                                                        Amazon (1.35 million sq ft) which would naturally cast a shadow on the 2018 results.
     Average size of                           86,767 167,306                                           Last year development was equally reserved with just 311,000 sq ft of development
     building taken-up                                    sq ft                      sq ft              starts (all speculative) and 370,000 sq ft of development completions, including DHL’s
                                                                                                        150,000 sq ft purpose-built unit at Avonmouth Logistics Centre.
Prime rents and incentives
     Rents (Q4 2018)                   per sq ft
                                                                                                         Key occupier deals
     Bristol                                        £7.25                       £7.39
                                                                                                         Location                                   Occupier                        Event                       Sq ft
     Typical rent-free                                    6-9                      7-11
     incentive (Q4 2018)*                           months                      months                   Horizon 38, Bristol                        Apec Braking                    Let                      115,000
                                                                                                         Hawkfield Business Park, Bristol            Bristol City Council            Sale                     101,397
Availability and stock
     Availability rate                                                                                   Pennywell Road, Bristol                    Confidential                     Sale                      86,933
     (Q4 2018)                                      11.4%                          6.2%
                                                                                                         Chippenham 79, Wilts
                                                                                                                                                    Wincanton                       Let                       79,178
     Stock                                             24.0                         30.6                 Distribution Hub
     (Q4 2018)                                       m sq ft                       m sq ft               Western Approach
                                                                                                                                                    Gregory Distribution            Let                       51,326
                                                                                                         Distribution, Bristol
Investment
     Prime Yields (Q4 2018)

     Bristol                                          4.5%                      5.03%                    Key development completions
     All industrial                                                                                      Location                                     Sq ft   Details
     investment                                     £95.4                  £194.1
     Volume (2018)                                    million                      million               Avonmouth Logistics Centre                 150,000   D&B for DHL
*10 year lease                                                                                                                                                Spec by St Francis Group/iSec
                                                                                                         Horizon 38, Bristol                        115,000
                                                                                                                                                              (let to Apec Braking)
                                                                                                         Western 105, Western
                                                                                                                                                    105,000   Spec by Richardson and Curtis Hall
                                                                                                         Approach, Bristol

Take-up                                                                                           Development completions                                       Prime rents and availability
       m sq ft                                                                                          m sq ft                                                       £ per sq ft                                %
7                                                                                                 4.5                                                           16                                                   16

6                                                                                                 4.0                                                           14                                                   14
                                                                                                  3.5                                                           12                                                   12
5
                                                                                                  3.0
                                                                                                                                                                10                                                   10
4                                                                                                 2.5
                                                                                                                                                                  8                                                  8
3                                                                                                 2.0
                                                                                                                                                                  6                                                  6
                                                                                                  1.5
2
                                                                                                  1.0                                                             4                                                  4
1                                                                                                 0.5                                                             2                                                  2
0                                                                                                  0                                                              0                                                  0
         2014           2015           2016           2017             2018                               2014     2015        2016   2017   2018                      Q4’14        Q4’15    Q4’16   Q4’17   Q4’18

           Let/sold                                                                                         Speculative                                                   Bristol
           Pre-let/pre-sold/occupier development                                                            Purpose built                                                 Availability rate (RHS)
           Regional average                                                                                 Regional average

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