Speculative logistics has two dates, the one developers quote and the one the equity needs, and the letting risk lives between them.
A speculative warehouse stays profitable for as many months as its profit at completion divided by the monthly cost of carrying it empty: break-even void = profit if let on completion ÷ (interest on total cost + empty holding costs). On an illustrative 20,000 m² scheme costing 23,000,000, with 3,739,888 of profit if let on day one and 159,167 of carry a month, the profit is gone after 23.5 months unlet. A 15 per cent target profit on cost survives only 1.6 months.
Worked in full in Logistics and Industrial Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Developers describe speculative logistics as low risk because the break-even void is long. Both dates are true, and they answer different questions. The first says when the scheme starts losing money; the second says when it stops earning the return that justified starting it. The gap between them is the letting risk, and it should be priced, not described.
| Input | Value |
|---|---|
| Lettable area, m² | 20,000 |
| Expected rent per m² a year | 75 |
| Rent a year | 1,500,000 |
| Investment yield on the let building (illustrative) | 5.0% |
| Purchaser's costs deducted from value | 6.8% |
| Rent-free on a ten-year lease, months | 9 |
| Letting and legal fees, share of a year's rent | 15% |
| Total cost at completion: land, build, fees, construction finance | 23,000,000 |
| Finance rate on the full cost after completion | 7.0% |
| Empty rates, insurance, security and services a month | 25,000 |
Net realisation = rent ÷ yield ÷ (1 + purchaser's costs) − rent-free − letting fees
1,500,000 ÷ 5.0% = 30,000,000; net of costs 28,089,888; less 1,125,000 of rent-free and 225,000 of fees gives 26,739,888. Against a cost of 23,000,000 the profit is 3,739,888, 16.3 per cent on cost.
Carry a month = total cost × rate ÷ 12 + holding costs
Break-even void = profit ÷ carry
Void for a target margin t = (net realisation − (1 + t) × cost) ÷ ((1 + t) × carry)
In Excel: =(Value-Cost)/(Cost*7%/12+25000) for the first and =(Value-1.15*Cost)/(1.15*Carry) for the second. The carry is simple, not compounded; compounding shortens both dates slightly.
Interest is 134,167 a month and the holding costs 25,000, so the carry is 159,167, of which 84 per cent is finance. The profit lasts 23.5 months. The 15 per cent target lasts 1.6 months, because the scheme starts only just above it.
| Months unlet after completion | Carry | Profit | Profit on cost |
|---|---|---|---|
| 0 | 0 | 3,739,888 | 16.3% |
| 6 | 955,000 | 2,784,888 | 11.6% |
| 12 | 1,910,000 | 1,829,888 | 7.3% |
| 18 | 2,865,000 | 874,888 | 3.4% |
| 24 | 3,820,000 | −80,112 | −0.3% |
| 36 | 5,730,000 | −1,990,112 | −6.9% |
The honest appraisal is a probability-weighted one. Take four letting outcomes: let on completion with a 25 per cent chance, at six months 35 per cent, at twelve months 25 per cent and at twenty-four months 15 per cent.
| Let after, months | Probability | Profit | Profit on cost |
|---|---|---|---|
| 0 | 25% | 3,739,888 | 16.3% |
| 6 | 35% | 2,784,888 | 11.6% |
| 12 | 25% | 1,829,888 | 7.3% |
| 24 | 15% | −80,112 | −0.3% |
| Expected, void 8.7 months | 2,355,138 | 9.7% |
A scheme presented at 16.3 per cent earns 9.7 per cent once the letting is weighted, and that is before any movement in the yield. It is a fee for two years of letting risk, not a development margin.
| Yield | Let at completion | Let at 12 months | Let at 24 months |
|---|---|---|---|
| 4.75% | 22.7% | 13.3% | 5.2% |
| 5.00% | 16.3% | 7.3% | −0.3% |
| 5.50% | 5.2% | −2.9% | −9.8% |
At 4.75 per cent the break-even void is 32.8 months; at 5.50 per cent it is 7.5. A long void and a softer yield tend to arrive together, because both come from weaker occupier demand, so the bottom-right corner is not the unlikely one.
Break-even void = profit ÷ monthly carry: 23.5 months here, but the 15 per cent target is gone after 1.6, and weighted letting outcomes give 9.7 per cent. Price the void before buying the land. The book's development sheet, with the carry, the weighted letting outcomes and the land value they support, is in the free workbooks for this case. The cost of buying certainty instead is in what a pre-let rent discount actually costs, and the link between margin and time in what IRR a 20 per cent profit on cost gives.
Interest on the full development cost plus empty rates, insurance, security and services. On an illustrative 23,000,000 scheme at 7.0 per cent that is 134,167 of interest and 25,000 of holding costs, 159,167 a month, with finance making up 84 per cent of the total.
Divide the profit the scheme would make if let on completion by the monthly carry. On an illustrative warehouse with 3,739,888 of profit and 159,167 a month of carry, the break-even void is 23.5 months. The void at which a 15 per cent target margin disappears is far shorter, 1.6 months.
Enough to survive the expected void and a yield move. An illustrative scheme showing 16.3 per cent if let on completion earns 9.7 per cent once four letting outcomes are weighted, and only 5.2 per cent if the yield moves out to 5.50 per cent even when let immediately.
This article is one calculation from Logistics and Industrial Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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