Segro tackles London housing shortage with homes-cum-warehouses approach

Dual-track strategy in Hayes project will allow UK industrial property developer to profit from premium value of residential land while supplying floor space for e-commerce and other modern industries

PUBLISHED : Tuesday, 16 February, 2016, 7:55pm
UPDATED : Tuesday, 16 February, 2016, 7:55pm

At a disused coffee factory in west London, Britain’s largest listed industrial property developer is embarking on what it hopes will become a new approach to easing the capital’s housing shortage.

As well as converting part of the 12.1-hectare site into warehouses, Segro has set aside some of the land for new homes – an unprecedented step for a company that has spent the best part of a century reshaping industrial land.

“London needs jobs along with housing,” said Alan Holland, director of Segro’s greater London unit. “The two can sit side-by-side very well.”

Segro’s entry into the housing market is symptomatic of a property shortage in London that, along with record-low interest rates, has contributed to a sharp rise in house prices over the past two years.

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Its dual-track approach at the former Nestle plant in Hayes will allow the company to profit from the premium value of residential land while also supplying floor space for e-commerce and other modern industries.

Segro’s master plan to create a mini-community inside the M25 orbital motorway is also a step into the unknown, the success of which could hinge on attracting companies able to operate with minimal disruption to the homeowners next door.

Rival industrial property developers such as Prologis and Goodman Group have so far preferred the tried-and-tested method of redesignating suitable land for sale to a specialist residential developer.

With London needing about 50,000 new homes annually over the next two decades, according to property consultant Savills, abandoned industrial land is much in demand. The government pledged in November to release more such land for starter homes.

Nine Elms is perhaps the best-known example of such regeneration. The industrial strip along the south bank of the River Thames, which includes the disused Battersea Power Station, is being converted into about 20,000 new homes.

Property developers have much to gain from the switch: in London’s northwest, for example, residential land values were 54 per cent above the average for industrial land in 2015, according to Savills.

Segro has the advantage of owning industrial land so coveted by housebuilders. Its long history in the business – the company began life in 1920 as a syndicate that acquired workshops and surplus vehicles from the first world war – also puts it in a strong position to acquire new sites.

Industry contacts, said Holland, were key to its off-market acquisition of the Hayes site, the value of which will be enhanced when the local rail station becomes part of the capital’s planned high-speed Crossrail network.

Four years ago, Segro began a major overhaul that resulted in its exit from several European markets and a renewed focus on e-commerce operations.

Mixed-use schemes provide an opportunity to maximise returns on land in a market where construction costs have increased significantly and potential returns are eroding
David Brockton, analyst, Liberum

David Brockton, analyst at Liberum, said the premium value of residential land would help offset the risk attached to the development of the Hayes site, provided Segro used third parties in areas “where they don’t have specific capabilities”.

Segro, which had a greater London portfolio worth £2.56 billion as of June 30, plans to partner with a residential developer, the identity of which will be revealed by April.

Each partner will fund their respective plots separately but speak with one voice when dealing with planning authorities and other interest groups.

“Mixed-use schemes provide an opportunity to maximise returns on land in a market where construction costs have increased significantly and potential returns are eroding,” said Brockton.

They also face challenges. Few residents would choose to live next door to a noisy, round-the-clock warehouse. Companies in turn might think twice before moving into a site where complaints from local residents might restrict their operations.

One option would be the installation of soundproof barriers, although that would entail significant cost and take up valuable real estate.

“Developers will find it difficult to make it all stack up in terms of viability,” said Mark Webster, head of the British national logistics and industrial team at Cushman & Wakefield.

The juxtaposition has worked in other parts of Britain, though generally on much larger plots.

Goodman Group and a local partner redeveloped the old Jaguar Cars plant in Coventry, central England, into industrial sheds and offices before selling a patch of the 40.5-hectare site to housebuilder Taylor Wimpey.

Working in London, in direct partnership with a housebuilder, is a different approach, something that Segro’s Holland says requires a “common vision”.

“The two parts need to be integrated, rather than wholly separated,” he said.