Challenging Times But Positive Thinking Required
10 August 2010"As the commercial property market continues to see limited signs of improvement in some sectors, cautious optimism should be tempered with the realisation that until the credit markets improve recovery will be slow" according to Robert Ditty, Investment Director, Osborne King Commercial Property Consultants.
The retail market continues to experience challenging economic conditions. Limited demand means that both High Street and shopping centre vacancy levels remain above where they would have been three or four years ago, however, they are marginally better than ’09 levels. Current vacancy levels tend to reflect individual circumstances so that Belfast city centre, for example, is still in the latter stages of trying to digest the impact of Victoria Square. The net effect is that landlords are proving to be very realistic and imaginative in terms of filling vacancies and securing tenants by offering enhanced rental packages and lease terms.
Nevertheless, demand still exists for retail space notably from discount stores. New entrants Poundland, B&M Bargains and Poundworld have opened an estimated 25 stores cumulatively across Northern Ireland. Capitalising on current economic conditions, these stores are firmly in the ascendancy and continue to expand with newcomer, Home Bargains, currently fitting out a store at Longwood Retail Park.
Out of town, we have witnessed a fair degree of activity during the first half of 2010 with French sporting goods retailer, Decathlon, opening its first store in Ireland at Holywood Exchange outside Belfast. The last remaining vacant unit at Damolly Retail Park in Newry has been let to Mothercare for a headline rent of £20 per sq ft. Elsewhere, Longwood Retail Park, Newtownabbey, is now fully let with recent lettings to Home Bargains, Dreams and Creations. The John Lewis/Sprucefield planning inquiry is still scheduled for October when the Planning Appeals Commission is due to make a recommendation on the revised planning application submitted by the developers.
All our major food store retailers remain active, however, due to the scale of development and our planning process, the time line for delivery of development proposals is clearly longer than would be expected for High Street applications resulting in a very long lead-in from proposal stages to completion.
It would appear that cross-border trade is diminishing mainly due to some re-adjustment of prices south of the border coupled with currency fluctuations. While we envisage an increase in cross-border trade over the Christmas period, it is likely that this will be focused primarily on our local food store retail offer. Looking ahead, it is difficult to see any significant improvement or change of emphasis regarding future growth in the retail sector. The VAT increase scheduled for January will test retailers who will most probably try to absorb some of the increase in order to remain competitive at the expense of profit margins.
Proposed public sector cuts could impact further on Government requirements. This is a matter of concern, particularly since Government is a dominant player accounting for over 50% of local office stock. Apart from a limited number of smaller office requirements in several provincial towns, it would appear that Government is committed to actively seeking ways of achieving best value in terms of its existing office stock and that future growth in this market will be predominantly dependent on the private sector.
There is some evidence of limited activity within the private sector mostly for smaller scale requirements of up to 10,000 sq ft whilst a number of key new Grade A buildings continue to seek occupiers. Over supply coupled with limited demand means that competition is keen among landlords to secure tenants with the latter seeking more flexible terms that include break clauses, shorter leases and enhanced incentive packages.
The investment market has seen limited activity in 2010 as our traditional debt-based buyers have all but disappeared. Interestingly, we are seeing strong signs of institutional investors coming back into the commercial property market, which they once dominated. The fact that fund managers are diversifying from other asset classes and investing more widely in commercial property is a vital step forward in terms of stimulating the market whilst also serving to redress the balance between private and institutional investment. While the institutions have focused predominantly on Greater London and southeast England, there are indications that they are also prepared to consider re-investing in Northern Ireland as evidenced by the recent sale of Damolly Retail Park, Newry to London-based Metric Property Investments plc. As we look ahead to 2011 and with the banks still reluctant to lend into the commercial property market, the challenge for us will continue to be identifying new buyers willing and able to invest in our local market.