Built for business: Finding the perfect niche for corporate property development
Thanks to a diverse occupier base and demand far outstripping supply, small-scale industrial and warehouse units offer investors the ideal combination of resilience, risk protection and steady return.
People often ask me why Stellar Asset Management focuses its commercial property investment on space for small- and medium-size enterprises (SMEs) rather than offices, retail or other high-end development. Our investment team regularly assesses all the various options. Invariably, development for SMEs comes out as the perfect niche.
Why? SME units may not attract much attention from architectural awards bodies. But this is a vast, vibrant and largely underserved market. SMEs account for three fifths of the employment and around half of turnover in the UK private sector.
Yet, despite being the lifeblood of the British economy, all too many SMEs struggle to secure enough space to operate effectively and sustain growth. Many find themselves sitting on endless waiting lists for available space or being forced to make do with substandard premises with poor access to key customers and staff.
The gap between demand and supply was already significant before the COVID-19 pandemic. Since then, the accelerating growth in e-commerce and resulting need for ‘last mile’ distribution hubs has heightened the demand for space close to transport networks.
This shortage of SME units would in itself make this an attractive target for development investment. The diversity within this segment of the economy also creates a huge pool of potential occupiers. Many are likely to be owner-occupiers, which fits our strategy of development and sale. We are happy to offer short-term lets while units are being marketed for sale, but we do not want the cost and risk of being a long-term landlord.
By contrast, the ‘big shed’ warehouse developments we see springing up across the country open up the risk of putting all your eggs in one basket. After all, there are only a finite number of e-commerce giants who need that kind of capacity.
In turn, the already risky retail and office markets have become even more unstable in the post-pandemic environment. Suitable urban sites are also expensive and come with high fit-out, marketing and management costs.
So, how do we select the right sites?
All the development land we buy has planning permission in place. This is generally on existing industrial estates that are looking to expand. We favour out-of-town sites near major road and rail links. For example, our recently completed Tavis House Business Centre in Haddenham, Buckinghamshire is close to junctions 7 and 8 on the M40. There are also nearby rail connections to Birmingham and London Marylebone.
This kind of site is at a premium and market prices are high. However, our extensive contacts with local agents across the country mean that we can get an early heads-up on potential opportunities and acquire at favourable off-market prices.
The rigorous due diligence process starts with evaluation by our development partners and independent surveyors. The potential sale is then reviewed by our investment committee. Both the selected site and the price need unanimous committee approval before the deal goes through.
Following acquisition of the site, our development partner puts the architectural and construction contracts out to tender. Selection is very much based on quality and record as well as price. The right contractor may therefore not be immediately available. But we allow for this in what is generally a 24-36 month timeline form site selection to sales completion and exit.
The ideal development offers a broad range of unit sizes. For example, the Tavis House Business Centre development comprises 20 units varying from 1,650 to 70,000 square feet. The range helps to broaden the available market of potential occupiers. Further flexibility comes from the ability to combine units, partition them and put in mezzanine floors for office staff.
While sites are generally acquired off-market, the sales process is led by local agents and backed by quality marketing. This includes looking to attract interest and secure pre-completion sales where possible.
It is a successful formula. For example, all the units in the Tavis House Business Centre are now sold or under offer. In keeping with the breadth of business we are looking to attract, the new owner-occupiers range from a beauty product supplier to an alloy wheel specialist. The four largest units have been acquired by an institutional investor.
As with our residential property investments, the foundations for financial security are the fact that we own the land upon which these properties are developed.
Further safeguards come from the fact that we do not just invest in property. We diversify our portfolio across a range of business activities, which include hotels, golf clubs and forests.
All contracts are subject to extensive due diligence and exacting terms. During development, both our investment team and independent surveyors carry out regular on-site evaluations to check on progress and costs.
Realising the potential
So, while our commercial property developments will not win any architectural awards, they are a perfect fit for our investment portfolio and our clients. They are supremely marketable and deliver good returns at low risk. They also offer the valuable economic dividend of helping to boost opportunities and growth for UK SMEs.
In future articles, I will be focusing on some of the other assets in our portfolio, the dynamics within these markets and the potential this offers for you and your clients.
If you would like to discuss any of the issues raised in this article, please get in touch with one of our team today on 020 3195 3500 or contact firstname.lastname@example.org.
Written by Jonathan Gain
Stellar Asset Management Limited does not offer investment or tax advice or make recommendations regarding investments. Prospective investors should ensure that they read the brochure and fully understand the risk factors before making any investment decision. The value of investments and the income from them may fall as well as rise and is not guaranteed. No assurance or guarantee is given that any targeted returns will be achieved. Forecasts of potential future results are not a reliable indicator of actual future results.
Stellar Asset Management Limited of 20 Chapel Street, Liverpool, L3 9AG is authorised and regulated by the Financial Conduct Authority.