End-users frustrated by chronic shortages of prime logistics space in key markets in the UK are snapping up speculative development projects, Prologis Europe president Philip Dunne says.

End-users frustrated by chronic shortages of prime logistics space in key markets in the UK are snapping up speculative development projects, Prologis Europe president Philip Dunne says.

Prologis is launching a 'consistent but modest programme' of speculative development in selective markets where occupancy rates are above 95%. The developer will likely have two or three project starts in the UK before the end of the year, Dunne told PropertyEU.

'Our development machine is definitely getting stronger; we are getting into our stride again and that will fuel growth,' he said in a phone interview following the publication of the company's second-quarter results.

There is virtually no supply of modern product in the core markets of the East and West Midlands and London at a time when demand remains consistent and is putting upward pressure on rents. The UK, Dunne said, is probably six months ahead of mainland Europe and is a good representation of what will transpire across the Continent over time.

'There is demand and some of it is starting to get frustrated at not being able to get access to the right product. Instead some end-users are compromising by taking short decisions on non-core product,' Dunne said. 'Rents are quickly getting to a place where we can justify bringing through a modest amount of speculative development in some very specific locations.'

Prologis' European boss added: 'The interesting thing is that as we tell the market what we are doing we are increasingly seeing customers moving faster and choosing to commission a build-to-suit property at the site of the proposed speculative development.' This is leading to the increasing use of the term 'spec-to-suit'.

Dunne believes the move from an almost exclusive focus on commissioned projects to a modest amount of speculative activity will spread to the Continent. 'Germany will be next to follow and then Central Europe,' he said. The Benelux and Sweden will also see the same pattern, while Southern Europe will lag behind.

Prologis is already contemplating a speculative development at a site in the Czech capital Prague where there is effectively no supply of modern, prime space, Dunne said.

PROLOGIS EUROPE Q2 PERFORMANCE

Prologis’ operating and development portfolio in Europe comprised 12.6m m2 of logistics real estate at end-June 2013. Occupancy remained stable at an above-market rate of 93.1%, which is 20 basis points ahead of expectations.

Demand continues to be driven by the reconfiguration of the supply chain, trade and e-commerce. The strongest markets in Q2 were:
- UK: East and West Midlands, London and Southeast
- Northern Europe: Cologne, Dusseldorf, South Netherlands
- Southern Europe: Lyon and Le Havre
- Central and Eastern Europe: Poznan and Warsaw

Second-quarter leasing activity totalled 786,600 m2, with approximately 267,700 m2 of new leases across Europe. Build-to-suit (BTS) continues to dominate development activity; based on preliminary estimates there was only 9% speculative development during Q2.

Prologis began three developments totaling 65,200 m2 in Q2:

- 34,900 m2 BTS for EKO Holding, a new customer, at Prologis Park Wroclaw V
- 18,300 m2 BTS for Tradis, part of the Eurocash Group, at Prologis Park Wroclaw V
- 12,000 m2 extension at Prologis Park Unna in Germany for Van Eupen, a third-party logistics provider