Why energy should be put into unloved sheds

Industrial and logistics assets have been the wise choice for investors of late, and this looks set to continue: the introduction of the Minimum Energy Efficiency Standards will drive interest in refurbishment and repurposing It has been quite a year for the logistics market. Its resilience in the wake of the EU referendum has increased its exposure to investors, and – combined with the changing dynamics in the retail sector – has meant that sheds are still the hottest ticket in real estate. A new space race in the face of land shortages has defined the future of the market and the Brexit stockpiling has affected some of the short-term delivery expectations. However, amid this, one thing has quietly gone under the radar – a ruling that has arguably had the biggest impact on the logistics market. The Minimum Energy Efficiency Standards, which came into force in April last year, says that any properties in its lowest-ranked categories will be lawfully unlettable. Just before the change in regulation, EG used Radius Data Exchange figures to show that 16% of all industrial units on the market were classed as falling into brackets F and G – the lowest bands on the EPC rating chart. One year on, the number has decreased to 10% – an improvement, but not a conclusive eradication of now‑redundant stock. As a result, asking rents at the top end of the EPC ratings have increased – pushed by increased occupier appetite as well as the removal of the F- and G-rated properties from the stock inventory – shifting upwards on average by 9% since last year in currently available units. Those units that are no longer fit for the market are now in the process of being repurposed. Radius Data Exchange analysis finds that since 2014 the number of new homes delivered on industrial sites through applications has risen by almost 1,000%, making up almost one-third of all change-of-use applications away from traditional logistics buildings in 2018. Given the vast portfolio of “EPC-redundant” sheds scattered up and down the country, it is not surprising that not all are being repurposed. Our data also shows that planning applications submitted for refurbishment of those industrial premises have risen by 12% since this time last year. In terms of square footage, applications for new logistics premises have increased by 24% year-on-year, with almost three-quarters of these coming in for sheds no larger than 45,000 sq ft. So with investment in the sector still strong, the future looks bright. One year on from the EPC change, the bottom end of the shed food chain has continued to evolve. Low‑spec but often geographically well connected, many of these sub-prime units will continue to be repurposed into homes, office and even retail and leisure destinations. Consumers are driving the next phase of logistics. With the online share of retail spend breaching 21.5% last Christmas, the way that goods are stored and transported has changed and is continuing to change. Not only will we see more large sheds in the regions – like those that traditionally adorn the arterial motorways of the golden triangle – but also an increase in smaller, dark last-mile units, sandwiched in nooks and crannies in our busiest towns and cities. The growth of both types will be driven by retail spend online, expected to push through 35% in the next five years. While conversion is often sensible, eradication of lower‑level stock could create logistical problems in the not-too-distant future. To send feedback, e-mail james.child@egi.co.uk or tweet @JamesChildEG or @estatesgazette