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Easy money drives subletting

21 September 2023

BASICALLY, AN occupier could now sub-let part, or even all of their warehouse space and make enough money to pay the rent on the space and even make a profit.

Liza Helps, Property Editor, Logistics Matters

Obviously that will depend on exactly when the space was acquired but with the rapid increase in rents over the past couple of years the differential could be quite substantial and if the space is not being used/surplus to requirements, it is a reasonable course of action to consider.

During the pandemic a lot of occupiers took space to secure extra storage at a time of huge supply chain disruption. Total take up of units over 100,000 sq ft in the three years between March 2020 and March 2023 hit 153.2 million sq ft. According to Savills research - 50.1 million sq ft was taken up in 2020 and a further 55.1 million sq ft in 2021 as well as 48 million sq ft in 2022. Taking the five year average of 28 million sq ft per year to 2020, a more ‘normal’ take up would have seen only around 80 million sq ft taken up across the three years.

In the same time period average rents for logistics and industrial space across the UK rose by as much as 50% in some locations. Knight Frank’s 2022 UK Logistics Market Outlook Report predicted that industrial rents were expected to rise an average of 4.2% per annum over the five years to 2027. It noted at the time that rent levels in Greater London had an average rent rise forecast of 8.7% in 2022 alone, with double-digit growth predicted for areas of intense demand and short supply. In 2021, prime London rents rose 25% for units over 50,000 sq ft and smaller units recorded even stronger growth, with prime rents for units sub-20,000 sq ft rising 56% over the year.

This correlates with the latest Savills World Research’s annual analysis of 52 global markets noting that London holds the record as the most expensive place on earth for warehousing space.

Anecdotal evidence suggests that some occupiers are able to sub-let surplus space for nearly £2 per sq ft more than they have fixed with their own landlord.

For those not in London, while the rental outlook is not nearly so dire, rent increases are still substantial clocking up 30% plus increases in the three years to 2023. JLL’s latest UK Industrial Spotlight for September notes that prime headline rents for UK standard industrial units between 10,000 and 20,000 sq ft were 8.6% up on the same time last year while headline rents in the big box logistics of 100,000 sq ft plus market were 9.5% higher than 12 months ago.

Anecdotal evidence suggests that some occupiers are able to sub-let surplus space for nearly £2 per sq ft more than they have fixed with their own landlord. This happens because rent terms are usually fixed for five years and then renegotiated at rent review. An occupier in the Midlands sub-let a Grade A warehouse at a rent of £8.50 per sq ft when the passing rent (the rent they originally negotiated) was in the region of £6.75 per sq ft. Basically, allowing them to keep the space for future use, pay the rent and secure a profit of 25% on the rent terms for the duration of the sub-lease.

Amazon, which is looking to secure a tenant on its Peterborough 736 building could be looking at a profit per sq ft as well. It secured a rent on the 736,997 sq ft building at around £5.30 per sq ft in early 2022. Average rent levels for prime space in the area are around £8.50 per sq ft – although this may be lower for larger, older second hand stock.

On a purely academic basis even a 50p per sq ft increase on the original rent level would see an uplift of nearly 10%. This is likely to be below market levels but still above the passing rent so potentially a win/win for both the sub lessor and sub lessee.

As well as getting the rent covered, the sub lessor can control when they take the space back (in a sub-lease), for example, in six months or even five years, but there is a sting in the tail. Having secured a higher rent for the space the original occupier has now provided the market evidence for their landlord when it comes to rent review to increase the rent levels for them going forward.

According to real estate analyst CoStar there are 51 buildings accounting for more than 6 million sq ft of industrial and logistics space being brought forward by occupiers for sub-let or assignment right now.