Inward Investment in Wales

Written evidence submitted by King Sturge

Commentary on Industrial Inward Investment in Wales

SUMMARY

The property market is an essential part of the ‘Wales offer’ to inward investors. This note provides a commentary on the industrial market in Wales and issues arising, including:

· Rising availability of secondhand floorspace allied with increased obsolescence.

· Trend of increased availability of larger secondary units (100,000 sq ft+).

· Reduced demand - however still a flow of good quality occupier enquiries.

· Reduced closures relating to existing manufacturing investors and increased FDI enquiries.

· Take-up is dominated by modern stock in more accessible locations.

· Secondary floorspace away from M4/A55 is experiencing more difficult market conditions.

· Much reduced new speculative development.

· Abolition of Empty Property Relief for business rates has had an impact upon both secondhand markets and new development.

1.0 SUPPLY

Available industrial floorspace in Wales has risen by 11% over twelve months, according to the March 2011 UK Industrial Floorspace Survey. This survey relates to units in excess of 5,000 sq ft and is undertaken bi-annually by King Sturge.

A total of 18.28million ft² of industrial floorspace is currently available in Wales, with the trend of rising availability being affected by the number of larger units available. Floorspace in units of over 100,000 ft² now represents 5.66 million ft² or 31% of the Welsh total available stock.

To put this in context, industrial floorspace availability peaked at just over 11.73 million sq ft in the last recession (August 1993) with a subsequent low of 8.3 million sq ft (summer 1998).

In summer 2005, availability stood at 11.66 million sq ft; therefore there has been an increase of 56.8% over 6 years. In addition, these figures exclude a significant amount of floorspace which has been vacated and subsequently demolished for redevelopment (e.g. AWE / Federal Mogul, Llanishen; Draka, Llanelli; Pirelli, Newport; Arjo Wiggins, Ely, Cardiff).

Industrial Floorspace Availability in Wales – a 10 year view

Source: King Sturge Industrial & Distribution Today Survey, March 2011

This is a difficult time for the economy and property market as a whole, however, the breakdown of these availability figures indicates that certain sectors of the market have fared better than others.

Over the past two years, the level of transactions has slowed however there remains a steady flow of occupier transactions. These transactions have illustrated that the downturn has had only a limited impact on rents and capital values for prime stock along the M4 and A55 corridors, although lease terms and incentives have moved in favour of the tenant. Secondary stock, in secondary locations, has however not fared so well with reduced demand leading to falling rents and capital values.

There is a trend of increased ageing of vacant stock and an emergence of an underclass of secondary assets that few wish to buy and few can afford to hold. As a general point, where larger industrial sites are re-occupied, the incoming occupier is rarely of the same quality as the departing company – with overflow warehousing and manufacture likely.

2.0 DEMAND

For South Wales, we have plotted the location of those industrial transactions over 50,000 sq ft that have taken place in the period from Summer 2009 to Summer 2010. This plan illustrates a strong bias towards the M4 corridor noted and further analysis indicates a bias towards modern stock.

Tough Times Away from the M4

16 transactions over 50,000 ft² in South Wales (Summer 2009/Summer 2010)

In our view, away from the primes markets, the quantum of floorspace coming to the market in the secondary sector is now having an impact upon capital and rental values; however this re-valuation has generated further demand. Whereas capital values for secondhand units in Cardiff might have shifted from £50 to £40 per ft², in the mid and upper Valleys there are examples of units moving from £35 to £15-20 per ft² which then looks attractive for owner occupiers.

In the period from Summer 2010 to the present day, there has been increased activity within the Valleys. However, these transactions have been undertaken at significantly reduced rental and capital values compared to historically higher levels.

B2 MANUFACTURING TRENDS - For much of the past 12 years, the trend has been for mainstream manufacturers to disinvest from Wales with plants closed and production transferred to so called ‘low-cost’ economies. Many of these operations could be described as ‘branch plants’ of multi-national companies.

In our South Wales Report, March 2009, we noted: "South Wales had started to shake off the trend of "manufacturing shift" to lower cost economies. However, any benefit has been heavily outweighed by the economic downturn."

In our South Wales Report, dated March 2010, we noted: "Whilst our manufacturing sector continues to be hit by closures and job losses, these often appear to be more to do with recession than an over-riding desire to "off-shore" to low cost economies. Research by the trade body, EEF, highlighted one in seven companies repatriating production back to the UK amid concerns over quality control and staffing levels. We have seen a number of such enquiries return to the Welsh market."

In our 2011 South Wales Report, we noted: "Whilst not quite a renaissance, there has been an upturn in manufacturing underpinned by the favourable exchange rate. There are blue chip enquiries back in the market and many existing firms, which were considering their future, appear more settled".

Over the past 18 months, we have received a slow but steadily increasing flow of strong quality occupier enquiries, including the following transactions, with the following trends emerging:

· Expansion or relocation requirements for existing major occupiers, e.g. Invacare UK Ltd has relocated to Pencoed Technology Park, Bridgend (152,000 ft²).

· New FDI enquiries, with a focus upon aviation, defence and automotive, e.g. Toyoda Gosei’s acquisition of Valeo Park, Swansea (214,000 ft²).

· Service sector companies – both for our ‘anchor companies’ and the wider economy, e.g. Gardner Aerospace, Hawarden Business Park (25,337 ft²), Minton Treharne, Forest Farm, Cardiff (63,775 ft²).

Well located modern floorspace has proved successful in attracting good quality occupiers, as evidenced by transactions in South Wales at Parc Nantgarw, Imperial Park and Pencoed respectively.

With the pipeline of new development likely to be severely constrained over the next few years, we envisage a continued focus by occupiers on modern, well located stock, whilst values for secondary assets continue to drift.

B8 DISTRIBUTION TRENDS - Across the UK, the B8 distribution market (Use Class B8: Use Classes Order 1987) has been a major driver of activity in terms of new development. This has been fuelled by increased importation of goods into the UK and a drive to consolidate and make more efficient existing distribution networks.

South Wales is not a recognised B8 location for national UK requirements being a ‘fringe location’ within the UK and also suffering from the dual constraints of the Severn Bridge tolls and congestion along the M4 north of Newport. In contrast, Avonmouth has grown significantly as a B8 centre in recent years having attracted a series of major schemes including ‘consolidation projects’ for Tesco and Constellation Brands - which have led to closures of subsidiary warehouses for both on Newhouse Park, Chepstow.

Within South Wales, the exceptions are the Wilkinson 850,000 ft² project in Magor and Amazon’s 800,000 ft² ‘internet fulfilment centre’ on Fabian Way in Swansea.

In recent years, B8 activity has focused upon central South Wales rather than Magor/Chepstow with Lidl having developed 320,000 sq ft in Bridgend, Peacocks in Parc Nantgarw and Aldi having acquired a 35 acre site in Wentloog, Cardiff (although it has recently placed this back onto the market).

There has also been a growth in the number of enquiries for local delivery units, typically 30-50,000 ft² for parcel delivery, distribution and service sector. We believe this is allied to the growth in internet commerce. Prime lettings have taken place involving Veolia Transport (56,000 ft²), Smiths News (52,000 ft²), City Link (50,000 ft²), Amtrak (now FedEx) (22,600 ft²).

There is an impression within the property industry that planners are generally ambivalent to B8 projects with the quality of jobs not regarded as equivalent to manufacturing. In our view, there is market demand for a South Wales Distribution Park of 30-50 acres to service the conurbation – this site would need to have strong road access, a central location and be located away from housing to facilitate 24 hour working.

3.0 ISSUES AFFECTING THE INDUSTRIAL PROPERTY MARKET

We highlight the following issues affecting the industrial market:

3.1 Condition

3.2 Lack of Speculative Development

3.3 The Abolition of Empty Property Relief (Business Rates)

3.4 Transport & The Severn Bridges

3.5 What Inward Investors Want

3.1CONDITION

There is an impression of ‘creeping obsolescence’ of the industrial stock, caused by an ageing property stock, reflecting the past successes in the 1960s-1990s in terms of attracting industry. The age profile of these businesses contributes to the proportion of ageing stock with a number of buildings reaching the end of their economic life (typically 35-40 years).

The ageing of the industrial base can, in itself, become a catalyst for closure with the requirement to re-invest in property, plant or process providing an opportunity to benchmark against relocation. In this regard, the opportunity to secure grant aid for refurbishment is important.

In addition, the fragmentation of ownerships of many larger industrial estates through the public sector sell-offs of the 1990s and subsequent trading of single units has led to deterioration in estate management. With no central estate management plans imposed at the time of sale, many estates have lost their ‘feel’ and need to be subject to improvement plans from local authorities.

3.2LACK OF SPECULATIVE DEVELOPMENT

The availability of new floorspace now stands at 428,000 ft², a decrease of 16% over 6 months and 31% over 12 months. At 2% of Wales’ total available stock this is the lowest percentage share of new stock across all GB regions.

The level of speculative development under construction within Wales has been on a declining trend since July 2007. Wales recorded a 66% decrease in the amount of new floorspace under construction since January 2010 (Source: King Sturge Survey).

With development finance scarce and developer confidence low, speculative starts are understandably low. The speculative development tap has been firmly turned off for the foreseeable future. In the medium term this will lead to a shortage of new-build stock in prime locations and therefore rising rents.

In the short term, new development is likely to be driven by design & build projects for more specialist facilities which cannot be accommodated in those modern secondhand units constructed to a standard specification. This is likely to include facilities such as cross-dock distribution units, self-storage or units for the rapidly growing waste and energy sectors.

Historically, the Assembly Government (and WDA beforehand) has been innovative in exploring structured funding vehicles to either develop directly or offer financial support. The Welsh Industrial Partnership (WIP), a joint venture between RBS and WAG was established in 2002 to speculatively develop high quality industrial and business units in dis-advantaged areas whilst Dragon Partnership is a five year joint venture to develop speculative office and hybrid schemes in top tier grant areas. Under the Welsh Investment Strategic Partnership (WISP) initiative, WAG has taken head-leases to allow developers to speculatively develop high quality floorspace. More recently, the establishment in 2010 of a £55 million fund under the JESSICA initiative (Regional Investment Fund for Wales) could develop a significant influence in the Welsh funding markets. These initiatives have proved to be successful and should be further encouraged.

3.3THE ABOLITION OF EMPTY PROPERTY RELIEF (BUSINESS RATES)

The abolition of Empty Rates Relief (EPR), from 1 April 2008, for vacant property has led to an obligation for property owners and developers to be liable for business rates on vacant industrial property after an initial six months void period (three months for offices and retail). This is an active dis-incentive for speculative developers and investors alike.

The abolition of empty property relief has had a wide-ranging impact upon the industrial property market, contributing to an overall tone of reduced rental and capital values, which will, subsequently, affect the balance sheets of much of Wales’ industrial base.

SECOND-HAND MARKET - The dynamics of the market are such that one cannot disentangle the impact of EPR abolition from the impact of recession, lack of bank funding and investor & occupier confidence and say it is the single most important factor. In our view however, this extra cost has had a significant impact, particularly upon the weaker sectors of the property market. For example, in recent years the large secondary unit market has been dominated by property companies who have acquired vacant stock for re-letting, refurbishment, sub-division and re-development. These property companies have all but gone from the market and, whilst occupier demand and funding are clearly issues, the imposition of ‘empty rates’ has markedly increased holding costs for vacant stock.

The net effect is a reduction in demand for second-hand accommodation, falling prices and lower rental and capital values, particularly relating to secondary stock.

Finally, we have seen a number of manufacturing units operating at reduced capacity but deciding not to close whilst they compete for new projects within Group. The imposition of business rates on vacant space increases holding costs for these companies. Whilst temporary relief is potentially available (s44a application), the treatment from Councils is not uniform.

SPECULATIVE DEVELOPMENT MARKET - In our view, this Government action has particularly contributed towards the trend of reduced new speculative development.

Currently this charge is an active dis-incentive to future speculative development. Where a developer puts together an appraisal for speculative development, a void period of 12 -24 months is usually assumed until a letting is achieved. Indeed, in parts of Wales, new-build units have sometimes been vacant for substantially longer than 2 years. The introduction of business rates after 3 or 6 months for office or industrial schemes adds costs to the appraisal and clearly reduces each scheme’s viability.

The vision of a return to large scale speculative development in Wales may be somewhat distant, however; a longer period of rates exemption would make a positive statement about how the Assembly is working with business to encourage investment and employment.

We have previously made representations to the Welsh Assembly Government to propose a longer period of exemption from business rates for, say 2 years, for all new speculative development. This would have only a limited impact upon tax receipts as there is little or no speculative development taking place without this measure.

In our view, it is measures such as this where WAG has the opportunity to make a positive statement on how it can work with the property industry to encourage investment and employment in the construction sector. The lack of new floorspace will hinder economic recovery in Wales and if central Government is unable, or unwilling, to act then the Assembly should consider measures to address this.

3.4TRANSPORT AND THE SEVERN BRIDGES

In marketing business space across South Wales we rarely encounter any direct references to the Severn Bridge tolls, except within the warehousing and distribution sectors.

South Wales businesses tend to see the existence of the tolls as a ‘given’ to be worked around whilst inward investors will assume that the lower costs associated with South Wales will offset this cost – an interesting consideration in a ‘post grant’ environment.

The key impact is within the warehousing and distribution sector which has, arguably, been the driver within the UK industrial and logistics market over the past decade. As production has moved offshore so the UK has seen a significant increase in B8 warehousing, dominated by large ‘sheds’ alongside the major container ports or central motorway network. Whilst South Wales is a fringe location, in a UK context, the growth of Avonmouth as a regional hub illustrates the opportunity for South East Wales around Chepstow/Magor and Llanwern to share in this.

RELIABILITY - The issue of reliability relates predominantly to the original Severn Bridge which has an increased propensity for closure due to bad weather. In addition, and more seriously, the on-going repairs to address corrosion in the suspension wires have restricted HGVs to a single lane in either direction. This combination has; for example, materially affected the marketability of Newhouse Park which lies immediately to the South of the Chepstow interchange (Junction 2, M48) where close to one million ft² has recently been brought to the market.

Tesco has announced the closure of its 350,000 ft² chilled foods unit at Newhouse Park to transfer this activity to a ‘new build’ unit at Avonmouth. Other closures include the 151,000 ft² Constellation Brands unit at Newhouse Park which has also moved to a large distribution centre in Avonmouth – albeit Constellation already had their main base in England.

PERCEPTION - The concept of tolls for payment of major infrastructure projects is accepted the world over, however, there is still a public perception that we are ‘paying to get into Wales’. Any cancellation, capping or reduction in the toll (particularly for HGVs) would be invaluable in the marketing of Wales to national and international business communities.

3.5WHAT INWARD INVESTORS WANT

The macro-economic factors attracting inward investors have generally been fully explored before King Sturge, as a property consultancy, comes into contact with any project.

At a macro level, the UK manufacturing sector is heavily influenced by the strength of the economy and exchange rates, together with the performance of certain key sectors, e.g. automotive, aviation, electronics. At a local property level, we would note three main issues:

· Balanced Portfolio of Sites and Premises - on a spatial/demand/employment basis, a balanced portfolio of sites and premises appropriate to the needs of new industry is required. This approach was explored in the Property Strategy for Employment in Wales 2004-08 (PwC & King Sturge).

With significant cuts in public expenditure anticipated, funding for site assembly, planning and infrastructure is likely to be scarce and therefore a sharp focus will be needed on which sites/projects are key to economic prosperity and therefore should receive investment.

· High Level Contact – inward investors really appreciate the high level contact from Ministers (Westminster & WAG). There is an impression that this has become less of a priority for politicians and this should be reviewed.

· "Team Wales" – inward investors enjoy the one-stop nature of the public sector in Wales, which offers a confidential service for what are usually sensitive projects. This is important in driving through obstructions or bureaucracy – although, in our view, this approach has been less effective in recent years (as areas such as planning have become more procedural).

4.0KING STURGE LLP

This note has been prepared by Chris Sutton, Partner in the Cardiff office of King Sturge LLP, property consultants. Chris Sutton attended the Welsh Affairs Committee Breakfast Seminar on Monday 6 December 2010 and this note is intended as a follow-up to that discussion.

King Sturge has a significant exposure to the industrial sector with over 6 million sq ft of industrial floorspace currently being marketed in Wales.

Over recent years, King Sturge has advised on the disposal or acquisition of a wide range of manufacturing premises including many which were formerly occupied by inward investors, including Halla, Warner Lambert, DuPont, Impress Metals, ACCO Europe, AB Electronics, Visteon, Linamar, Valeo, LG Electronics, Hitachi, Fortune Brands (Therma-Tru Doors), Faurecia, Doosan Infracore, Kingspan, Christie-Tyler, Cambria Mobel, Wacker Neuson, Santon, Arjo Wiggins, Sony, Mitsubishi (Diaplastics), Allied Signal, L’Oreal and ZF Steering.

April 2011