News


Commercial Property Review 2010 / Outlook 2011

10 January 2011

2010 was another difficult year for the commercial property market and 2011 looks set to be equally testing featuring the painful process of market value re-adjustment and ongoing insolvency issues – both the natural consequences of any significant economic downturn. However, we do appear to be working our way through the recession and on a more positive note the investment, retail and office sectors in particular appear to be experiencing improved market activity.

RETAIL
Although the retail sector faces many challenges this year, including the recent increase in VAT and the potential impact of Government spending cuts, the market in Northern Ireland is extremely diverse making it difficult to predict the year ahead on a generalised basis. Firstly, most retailers are initially trying to absorb the increase in VAT in order to remain competitive, however, it is also anticipated that consumer expenditure will contract due to Government budget cuts and the resultant erosion of consumer confidence. Add to this, concerns over bank support for the retail sector and a dramatic worldwide increase in the cost of raw materials, which will undoubtedly drive up costs and one can see the difficulties that lie ahead.

Retail property vacancy levels remain above average due to limited occupier demand. The net effect is that landlords across Northern Ireland 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, selective demand still exists for retail space notably from the food sector, value clothing and discount operators. During 2010, new entrants Poundland, B & M Bargains and Poundworld 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, also now committed to the local marketplace. Similarly, discount fashion retailers including Matalan, Peacocks, New Look and Primark performed strongly and are actively seeking expansion opportunities province-wide.

Out of town, we have witnessed a fair degree of activity during 2010 with French sporting goods retailer, Decathlon and Bhs Home both opening their first stores in Ireland at Holywood Exchange outside Belfast. Meanwhile, the last remaining unit at Damolly Retail Park in Newry was let to Mothercare and a new unit for Lidl commenced construction. Elsewhere, Longwood Retail Park, Newtownabbey, achieved total occupancy culminating in lettings to Home Bargains, Dreams and Creations. In addition, the John Lewis proposal at Sprucefield still awaits a Public Inquiry. Although this particular sector is clearly closely linked to the strength of the housing market it has performed strongly in the current adverse conditions and should continue to hold its own in 2011.

Meanwhile it is business as usual for the food store sector with Asda, Tesco and Sainsbury’s continuing to expand province-wide, along with Lidl and the convenience store sector also showing a strong appetite for well located new store opportunities. Clearly in this sector the planning system remains key and lengthy delays in processing applications continues to stifle potential investment.

During 2010, Belfast City Centre in particular performed strongly with a raft of new retailers entering the Northern Ireland market for the first time. Leading UK fashion retailer Republic selected Castlecourt Shopping Centre in Belfast City Centre as the location for its first store in Ireland. Republic took over the former Zavvi Store comprising 10,000 sq ft of retail space spanning 2 levels on this prominent corner of Royal Avenue and Berry Street. In addition, White Stuff, Blacks, Guess, Hotel Chocolate, Cotswold Outdoor, Appy Feet, Peacocks, Liverpool FC and Miss Sixty all opened new units in the city centre.

Beyond the Greater Belfast area certain towns fared better than others in terms of expanding their retail offer. Going into 2011 we anticipate that current vacancy levels in many of the town centres and shopping centres across the province will prevail with only the strongest retail centres such as Belfast, Londonderry, Newry and Ballymena in a position to move forward being best placed to attract new retailers.

Ultimately there is no doubt that times are difficult and very competitive for retailers. More so than ever the need to control cost, offer value, a point of difference and adapt quickly to market trends will be vital for survival let alone making a profit. By its very nature, retailing attracts entrepreneurs and therefore many will be able to adapt and chart a path through these difficult times. Unfortunately, as we have seen in recent previous years, there will be casualties both within Northern Ireland and on a UK wide basis. Undoubtedly, the retail market in 2011 will continue to be turbulent and will require clear vision, bold decision making and above all else determination in order to survive.

OFFICE
There is no doubt that 2010 has been extremely testing with organisations across all sectors restricted in their ability to either relocate or expand their operations principally due to a continuing lack of funding and a deepening sense of business confidence being eroded on the back of public spending cuts. The fact that Government has no significant office requirements at present is a matter of concern, particularly since it is a dominant player accounting for over 50% of local office stock.

Despite this disappointing outlook, we are aware of a number of active requirements, which interestingly, relate to larger space ranging from 10,000 to 40,000 sq ft which is being driven by the private sector. Historically, one would expect office requirements on this scale to emanate from the public sector. Encouragingly, these private sector requirements are the result of successful efforts by Invest N.I. in attracting inward investment such as the letting earlier this year to the New York Stock Exchange, which plans to establish a high tech service centre through its subsidiary, NYSE Technologies in Belfast. More recently law firm, Allen & Overy, have confirmed their intention to open in Belfast and create in the region of 300 jobs.

During 2010, we negotiated the letting of 13,000 sq ft of office space to Grafton Recruitment at one of Belfast’s new mixed-use developments, The Boat. We have also completed an acquisition for UK-based company, Just Retirement Ltd, which has taken 5,000 sq ft of office space within the Arena building on the Ormeau Road, Belfast.


The Boat

There has also been active interest in Obel, another recently completed mixed use development, which subject to occupancy proposals under consideration coming to fruition, should see the building fully occupied by the end of 2011.

Rental levels remain relatively unchanged and it is still a case of landlords having to offer incentives such as break clauses and shorter leases in order to attract and retain tenants. Looking ahead to what 2011 is likely to bring, we are hopeful that a number of outstanding larger requirements will be fulfilled and that activity levels will improve. The interesting question that this raises is where does the future stock of Grade A office accommodation come from bearing in mind the recent improvement in occupational demand.

INVESTMENT
2010 proved to be a very positive year for the local investment market, which we anticipate will continue into 2011. This was highlighted by the sale of Damolly Retail Park in Newry to London based Metric Property Investments Plc from local development company, Corbo Ltd, for £34.9 million, reflecting a net initial yield of 6.25%. Following on from this Scottish Widows purchased Longwood Retail Park, Newtownabbey, from Corbo Ltd at a price of £48.0 million, reflecting an initial yield of 6.20%. Finally CBRE Investors, on behalf of an international investor, purchased the Marks & Spencer store in Donegall Place for £8.75 million, reflecting an initial yield of 5.25%. All in all a very impressive performance which reflects UK institutional confidence in Northern Ireland and we expect further similar transactions in 2011 as UK funds and property companies take advantage of market conditions and the opportunity to invest further in the province.


Damolly Retail Park, Newry

The fact that fund managers are 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. The main challenge during 2011 will be to build on the momentum of recent sales, encourage new buyers and hope that lending institutions free up more capital reserves for lending into the commercial property market; property remains a superior asset class in terms of return when compared with equities and bonds regardless of what the pundits say.

LICENSED PREMISES
Property prices have been declining steadily within the Licensed Premises trade leaving operators unsure as to where and when these will bottom out. In theory, pub and house values should not follow a similar trajectory as a pub’s value should be determined by its trading history and not reflect general property prices. In reality, pubs have tended to follow general property values in that many of the factors that have affected houses have also influenced pub prices such as the availability of finance, an increase in unemployment levels and over supply.

Any one of these factors in insolation is unlikely to impact on the market, however, cumulatively they have led to an unprecedented volume of repossessions. That stated, a number of transactions occurred during 2010 including the acquisition of the Adair Arms Hotel in Ballymena, which is now being refurbished by its new owner and the sale of The O’Neill Arms Hotel in Toomebridge at auction. Additional sales in which Osborne King was involved during 2010 include The Lighthouse in Ardglass, the Anchor Bar in Newcastle and Kaya in Bangor.


The O'Neill Arms Hotel, Toomebridge

We were also reasonably active during 2010 in respect of the sale of liquor licences, although the current market values of licences has fallen from a high of £130,000 to below the £100,000 with the primary source of sales to supermarket operators seeking to expand their product range.

The expectation is that 2011 will continue to experience difficult trading conditions in the licensed sector with reduced spend by the consumer and pressure on margin due to the increase in VAT. Further closures are anticipated coupled with consolidation across the sector.

INDUSTRIAL
2011 will bring limited change in terms of growth within the industrial sector of the property market. It is envisaged that the sector will continue to struggle with the uptake of new space due to the general economic climate. With no immediate hope of forward funding from the banks for new build developments, the older existing stock of warehousing will see some continuing interest and a possible resurgence. We believe 2011 rental levels will continue to be depressed with landlords willing to take substantial reductions in order to retain existing tenants or secure new tenants.


McKinney Road, Belfast

Rents will continue to range from £1.00 per sq ft to £4.00 per sq ft depending upon location, size and financial position of the landlord. Sales will continue to be limited with capital values ranging from c. £20.00 per sq ft to c. £60.00 per sq ft.

On the plus side, there are positive signs of new lettings for the first quarter of 2011 with tenants set to benefit from adjustments to rental levels and shorter leases of between 1 – 3 years increasingly commonplace. Landlords' contributions towards office fitouts are also becoming more widespread as are the granting of rent free introductory offers to new tenants and flexible lease terms.

Get in touch with us today

If you have a query then you can get in touch with us by calling the Osborne King office, email or leave an enquiry below.

Top ↑