GREEN SHOOTS BREAKING GROUND
22 November 2013As we emerge slowly from the economic gloom of recent years, encouragingly it appears that we have reached the bottom of the market and, in some property sectors, green shoots are beginning to appear. This is reflected in positive economic data released by the EU and UK over the past months suggesting that both jurisdictions are coming out of recession. The residential market across most UK regions and Ireland has experienced modest growth, and while Northern Ireland may be at the lower end of the scale, the government’s “Help to Buy” initiative should act as an impetus for continued UK-wide growth.
Turning our attention to home, 2013 has been the busiest year for investment property since the peak of the market in 2007 with approximately £200 million worth of deals due to be completed by the end of the year. This figure is more than double the value of sales transacted during 2012. This year also marks a significant change in the commercial property landscape in terms of ownership. New investors entering the Northern Irish market include Threadneedle Investments, BAE Pension Fund, Pramerica, all respected global asset managers or investment property companies. The return of institutional investors and major property companies should act as a catalyst for further investment in 2014. Noteworthy sales during 2013 have included the Invest NI building, which was sold for £39 million and Scottish Widows Investment Partnership’s recent purchase of a Tesco store in Newry for £30.3 million.
Whilst quality of product plays a pivotal role in the return of the institutional investors to our local market, they are also attracted by returns that are marginally better in Northern Ireland than in other regions of the UK.
Prices locally are also at a significantly more realistic level compared to five or six years ago when local debt-driven buyers effectively priced these fund buyers out of the market at its height.
Undoubtedly, prime commercial property is attracting interest from institutions and major property companies, however something of a two-tier market is emerging with a second tier characterised by short leaseholds, less secure income and multi-occupiers and heavily reliant on a small pool of local investors who depend upon access to debt funding. It is vital that this funding is made available if we are to see any significant improvement regarding sales of second-tier properties.
Transactional activity within the hospitality industry has increased significantly over the past year. One of the notable “highlights” of this year has been the sale of the Kurkova portfolio of seven pubs, which Osborne King sold recently for over £4 million. This portfolio attracted in excess of 20 offers from serious buyers, which was extremely positive but entirely reflective of the quality of assets on offer.
Demand for office space has been at its highest level for the past six years with companies and organisations taking around 280,000 sq ft of space during the first three quarters of 2013. The biggest letting of the year was to Land & Property Services, which acquired circa 98,000 of Grade A office accommodation at Lanyon Plaza. Meanwhile, established inward investment companies including Allstate, Citi, Allen & Overy and Concentrix acquired additional office space during the year. We also understand that a number of global corporate occupiers with an existing presence in Northern Ireland have plans to expand their business and are actually considering design and build opportunities owing to lack of Grade A stock availability.
At present, Belfast city centre has less than 135,000 sq ft of Grade A offices available, and with no substantial developments in the pipeline, this is an issue that needs to be addressed sooner rather than later. Rental levels currently remain static with Grade A transacting at £13 per sq ft but clearly, a lack of supply should force this rental level upwards..
As general economic conditions improve, this has not yet translated into any significant increase in transactional activity within the retail sector. That stated, retail is fast moving, so we expect the sector to react swiftly to improvements within the overall economy and during 2014 we expect to see a reduction in vacancy levels. Unfortunately, occupational costs and in particular existing rates liabilities remain key obstacles in terms of retail expansion, and in some cases, survival. Given that landlords have played their part in re-negotiating rents downwards, in many instances, some relief from government on the rates issue would provide a substantial boost to hard-pressed retailers.
Discount retailers have undoubtedly secured a major foothold within the high street, however a genuine and sustainable recovery within the retail market will not occur until a new energy and vibrancy returns to the fashion segment of the market. There are initial signs that this may be gathering some momentum and we anticipate positive movement next year. At any rate, it is unlikely that any significant retail-led development proposals will get underway in the short to medium term.
Clearly, we need to develop a sustainable solution to rejuvenate our towns and cities, which will require considerable thought and a structured approach to regeneration. It is difficult to see how this can occur without our politicians both in Stormont and Westminster recognising the damage that our current commercial rating system is inflicting on our high streets.
Substantial tax breaks will be necessary if we are to encourage the fundamental changes that will bring arts, community, business, educational and residential uses back to prominence as part of the mixed fabric in our urban centres. For our city and town centres to thrive once more, they need to rediscover their points of difference, distinctiveness and character in order to engage shoppers and visitors more.
Prevailing conditions within the banking sector and general property market means that the restructuring and insolvency process will continue to be an important avenue of recovery. This “cleansing” process needs to run its course and can do so in tandem with other sectors in recovery. A rising market will accelerate the banks’ ability to dispose of these assets in greater volume and therefore assist in the return to normal market conditions.
Across the broad property landscape, the outlook is more optimistic and predicated on the key elements of increasing demand, rising values and greater transactional activity. The general sense within the market is that we are in recovery mode albeit one that is measured and sustainable. It is clearly going to take some time for this recovery to gather momentum but the building blocks are now being put in position and growth is beginning to appear in the sector.