As the availability of prime investment stock remains low, Savills has observed an increasing number of investors looking towards development funding as a means of acquiring prime logistics assets.

Up until recently, much of the funding activity has been for pre-let opportunities. However, with yields having dropped to levels last seen in Q2 2006, investors' pursuit of premium returns is driving greater appetite for risk. This is contributing to an increased desire to fund speculative development, particularly in areas underpinned by a robust occupier market.

Since 2012 Savills have tracked 72 schemes of over 100,000 sq ft that have been constructed speculatively, or are due for delivery in 2016. This totals 13.6m sq ft of new floor space which is a long way below the 40.5m sq ft that was developed from 2005 to 2009. At current take-up levels the risk of oversupply is negligible and there remains substantial headroom for further speculative development to occur, some of which will be funded by investors.

Research by Savills estimates that of the 44 schemes announced in 2015, 41 per cent attracted forward funding commitments from third-party investors major institutions. Indeed, these forward funding commitments accounted for £247m of deployed capital, equating to just shy of 10 per cent of the total investment market for logistics (2015 YTD) as the chart below demonstrates.

Key speculative development schemes (100,000 sq ft +) funded by investors

The table above illustrates some of the markets where speculative funding is being undertaken by third party investors, suggesting preferences for established, core markets where the letting risk is deemed low and tangible.

We have also seen an increase in the availability of debt and structured finance/JV solutions, particularly for more complex opportunities outside established core markets.

In conclusion, we believe there is substantial headroom for additional speculative development into 2016 and beyond. We expect investors will increasingly seek funding opportunities within the sector as they seek to deploy capital into prime buildings in core markets, albeit at a price and structure that reflects the development risk.

As we anticipate annual investment volumes for logistics stabilising around £2.5bn-£3bn, we could see approximately £250m-£300m being committed to funding speculative developments.

Further information

For more details contact Savills Industrial & Logistics