With bidding wars driving up the price of industrial land in the Black Country to record levels of #300,000 per acre, some landowners would be better doing off-market deals.
The suggestion comes from Tim Matthews, Birmingham-based director of industrial and distribution property at Lambert Smith Hampton.
At the heart of the problem is a shortage of prime industrial and distribution stock and of development land. The problem is made worse in some areas where residential developers are competing for the brownfield sites which would automatically have been redeveloped for industrial and distribution.
According to Mr Matthews, this has led to developers offering record prices for industrial land in the Black Country.
It is rumoured that the 17-acre Metabrasives site in Bilston, despite the large buildings on it, has a sale agreed for a sum well over its #4.85 million asking price.
This was after achieving more than ten bids. A further 16 acres in West Bromwich has been sold to a property company, reportedly for a sum in excess of #4 million after a bidding round involving more than 20 interested parties.
To justify prices of around #300,000 per acre, when prices have been fixed at between #200,000 and #250,000 per acre for the past few years, developers will have to ramp up future rents and likely yields to justify these kinds of offers, gambling on the future performance of the investment market.
Unfortunately, some parties will offer the top price merely to get a position on the contract, from which they will chip down the sum to be paid eventually to the landowner.
In some cases the money will never change hands, as when they come to complete the deal, the rental returns which the winning developer projected will no longer add up, so they will either try and renegotiate the price or pull out and the deal will fail.
A situation like this occurred in 2002, when some developers were offering more than #500,000 per acre for prime industrial sites in Birmingham. When it came to completion, the appraisals could not be made to work and a number of pieces of land which had been 'sold' the previous year, came back onto the market in summer 2003. Most developers will shy off paying what they would regard as 'frothy prices' precisely because the appraisals do not add up, but often this is also because they have not actually had enough time to accurately assess a site and its potential before they are forced to bid on it.
An open market auction which attracts in excess of ten interested parties would seem to be the best way of ensuring the top price for the landowner.
It all comes down to time. Developers and their advisers need to be able to spend enough time assessing the potential and the worth of a site to them. If there is not enough time to gather all the information, then the bid is likely to be more conservative. Time spent in an open market situation is effectively speculative and, more often than not, will be written off by the developer, when the bid proves unsuccessful.
In an off market situation, management and advisers' time spent is more likely to be time invested in the final scheme, and if the potential has been properly assessed, is more likely to lead to a higher price and a deal which will actually come to fruition.
The off, and indeed, on-market route to selling industrial land, can be greatly helped by the owner having done a complete and thorough job of due diligence on his site for the eventual purchaser.
Full site investigations and planning reports should help speed through any sale, as they reduce the need for interested parties to request further information and cut down on the potential areas of uncertainty against which some parties may seek to chip the price. Unfortunately the sites that we assess for acquiring clients for which the vendor has not even supplied a topographic survey, nor looked at the capacity of services to the site, are too numerous to mention.
This lack of attention to detail can seriously harm a sale. We always insist that when selling a piece of land that we provide interested parties with as much information as possible, so that we achieve a sale at the optimum time and in the optimum timeframe.
In the last 12 months, Lambert Smith Hampton's Birmingham industrial and distribution team has disposed of more than 1 million square feet of manufacturing and storage space and more than 32 acres of land throughout the Midlands.