They’re flexible, investor-friendly and easy to build. But how much does it cost to construct small industrial units? Max Wilkes of Davis Langdon explains
01 — Introduction
Small industrial units are common in the UK and can offer a range of building uses. These include:
• Business units
• Industrial/warehousing developments
• Non-food retailing
• Science parks containing offices, laboratories and manufacturing processes.
• Many of the schemes are aimed at owners looking to invest in their own property via self-invested personal pension schemes (SIPPs). The idea is to provide flexibility for clients. These choices include:
- Providing freeholds or leaseholds
- Developing a range of unit sizes. These start from 150m² for a subdivided unit to more than 1,000m². The individual buildings can be offered as one complete unit or as subdivided units
• Different building alternatives, such as:
- Two storey office/business unit with a 50/50 mix consisting of business on the ground floor and offices on the first floor.
- Traditional warehouse with 20% office at the first floor
- Shell unit with all the accommodation on the ground floor only
• High-quality appearance – specifications that will appeal to owner occupiers.The use of these flexible options has proved successful: Kier has developed 100,000m² of its Trade City brand of industrial units and has begun to roll out the product from the South-east to the Midlands.
The key for the developer is to find sites that are in visible established industrial areas. They should offer a mix of unit types and sizes that will appeal to small and start-up businesses. Many of these will be on former manufacturing sites, disused military land and so on.
02 — Procurement
Developers’ main aims are quick construction with cost and time certainty – which are the strong points of design and build. The traditional competitive method of procurement is still used on a number of projects.
The development of small industrial units is mainly aimed at the speculative end of the market. Smaller companies are more cautious in agreeing to purchase or lease developments; they tend to wait till they can see what they are getting before committing to purchase or let the properties.
SIPPs for individuals or small self administered schemes (SSASs) for groups have been used by smaller companies to invest in small industrial units. The investor needs to cover purchase costs, legal costs and disbursements, such as Land Registry fees. Management fees for the pension fund run at about 1.4%. The purchase and all rent must be at market values, the benefit is that all rent paid is treated as business expenses for tax purposes and the pension fund is exempt from income tax and capital gains.
03 — Tax relief
Capital allowances are a common form of tax relief on small industrial units. These tend to take two forms: industrial building allowances and plant and machinery allowances.
Industrial building allowances are available on the full cost of the structure or envelope provided it is used for a qualifying trade, such as manufacturing, processing, transport and certain types of storage:
- Level of allowances are based on original construction cost, or purchase price if acquired unused from developer
- On new expenditure, allowances are given at a rate of 4% a year over 25 years and the allowance commences from date of first use.
Plant and machinery allowances are given on all qualifying fixtures installed within commercial property:
- There is no statutory definition of plant, and the allowance is dependant upon the claimant’s trade
- Tax relief over the entire life of the plant
- Allowances are generally given at 25% on a reducing balance basis
- Typical qualifying items are mechanical services, elements of electrical installation, low-voltage installations, such as fire alarms, lifts and escalators, furniture and fittings
- These allowances do not apply to land, buildings and most work to comply with the Disability Discrimination Act.
In total, capital allowances could represent a 30% saving of the build cost over time, which if discounted at 5% could still represent a net present value saving of 19%.
To encourage the use of brownfield sites, in 2001 the government introduced a tax relief for cleaning up contaminated land. The tax relief is given at 150% of the total clean-up costs, which usually equates to a 45% cash saving for the typical developer or owner.
04 — Design considerations
Smaller warehouses are similar to their larger cousins in design: they use a portal frame with cladding. However, they are typically 6–8m high to the underside of the eaves, instead of 10–13m high. They usually have a 4m high loading door. Design issues include:
• Major cost drivers: ground conditions and structural steel frame. Over the past two years, the cost of frames has increased substantially as steel prices have risen. For smaller spans, glulam portal frames could be an option.
• External works: these account for 15–25% of the total cost.
• Planning constraints and time taken to obtain permission. These may be onerous where:
- Restrictions are placed on the type of planning permission that will be granted.
- The proposed industrial site is close to residential zones
- There is a need for ample parking spaces, especially for distribution units where working shifts may overlap. The spaces may be excess of local planning guidelines
• Location of the site: small units are usually located in established industrial areas in town or edge-of-town locations. These should have access to existing infrastructure
• Size of warehouses: smaller schemes often offer a number of units of different sizes. The shell and services design might allow for units to be subdivided to meet tenants’ needs
• Layout constraints: the site requires good access, parking and loading facilities. The alternative of using dock levellers adds a premium cost that is not commensurate with the size of the unit
• Security: this is seen as an important factor and many of the parks come with gated access and CCTV coverage. Intruder alarms are provided in the units
• Building and fire regulations: while the escape distance may not be an issue, the division of the units will require adequate fire resistance provision:
- Boundary walls next to the site edge may be required to prevent fire spread
- Sprinkler installations should be considered in the fit-out because of the potential use of units for storage or manufacture of inflammable goods.
• Amendments to Part L in 2006 have introduced measures to reduce CO2 emissions by 28% in mechanically ventilated or air-conditioned buildings and 23.5% in naturally ventilated buildings. These are aimed at making the building fabric and services more efficient. They include:
- The requirement for systems to be subdivided into separate zones if there are different uses or solar gain. These should have independent controls
- Efficient heating and effective control systems for heating and water systems
- Reducing solar gains, for example the introduction of north-facing rooflights to increase the amount of natural light without the penalty of solar gain.
- Automatic lighting systems to dim/turn off lighting.
05 — Design criteria
- Loading: a uniformly distributed load of 30KN/m2 for factories, workshops and similar buildings; 3.5KN/m² for mezzanine levels
- Internal environmental temperature: offices should be 20°C, 16ºC is required for working and packing space, while 13ºC is acceptable for storage areas
- Ventilation: 0.5 changes per hour is needed in a working area, falling to 0.25 for storage areas
- Lighting: requirements from 100 Lux
- Car parking: typically, one parking space is permitted per 40–50m² of gross floor area
- Lorry turning circles of 13m; approach routes should have a clear minimum height of 5.03m
- Design loading of 20KN/m² for the service yard.
06 — Industrial units cost breakdown
The cost model is based on a single-storey new building with a gross internal floor area of 900m², subdivided into five industrial “shell” units. The development is built on a brownfield site, which has previously been cleared and any land remediation undertaken as part of a separate contract.
The building has a reinforced in-situ concrete groundbearing slab, steel portal frame with reinforced concrete pads, aluminium built-up cladding system to roof and walls, and internal blockwork walls. Each unit has a separate entrance door and one loading door with WC, basic lighting and natural ventilation. The external works consist of road, service yard and pedestrian areas. The units vary in size from 150–360m².
The unit rates are derived from competitive design-and-build tenders and are current at fourth quarter 2006, based on a South-east location. The building-only cost of £611/m² compares with mid-quartile costs collected by the BCIS of £410–750/m² for new-build industrial units with an area of 500–2,000m² in the South-east.
The costs exclude fit-out, heating, non-fixed fittings, tenants’ specified work, enabling works and demolitions. The costs of professional fees and VAT are also omitted. Unit rates should be adjusted for location, site conditions, programme and procurement route.
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Thanks to Matthew Timms of the Davis Langdon industrial group for information on the industrial units and Tim Beresford of Davis Langdon Crosher James for advice on tax relief