Cautious Optimism In Commercial Property

10 August 2011

The prolonged economic global recession continues to constrain the local commercial property market, however, signs of improvement and some positive activity within certain sectors are giving rise to a degree of cautious optimism that the market is stabilising and possibly rallying.

Investment
Investment activity continued in a positive vein during the first half of 2011 with just over £27m worth of deals transacted albeit in marked contrast to the same period in 2010 when deals worth £105m were completed; admittedly, this was an exceptional transactional period. Deals this year include Laharna and Strabane Retail Parks, which have been sold to an institutional investor, and the purchase of Phase II Braidwater Retail Park, Ballymena by LaSalle Investment Management at a yield reflecting 7.43%.  UK institutional investors and property companies remain interested in the Northern Irish market, focused primarily on the retail sector and, furthermore, seeking only prime assets. That stated, while we are aware of further investment transactions completing over the coming months, supply is becoming a significant issue. We have also recently seen a re-emergence of a gap in yields between Northern Ireland and other mainland GB assets: the yield differential may be as much as 150–250 basis points in some instances.

Retail
The retail sector is battling difficult market conditions with reduced occupier demand and persistent levels of vacancy as highlighted recently by a number of high-profile retailers entering administration including T.J. Hughes, Moben Kitchens and Habitat. Conditions vary depending upon location with Belfast city centre continuing to suffer from an over-supply of retail space while the retail warehouse sector in the Greater Belfast area is still able to secure occupiers.  Rents across the sector remain under pressure with landlords needing to consider attractive incentive packages in order to secure lettings.  Beyond Belfast, activity is subdued and centred primarily on the key regional centres of Londonderry, Ballymena, Newry and Craigavon.  The majority of new lettings are within the discount sector and include Home Bargains, Poundland, B&M Bargains, Poundstretcher and Poundworld. Established retailers such as Matalan, Card Factory, Primark, JD Sports and Argos continue to pursue opportunities.  The food store sector remains active with Tesco, Sainsbury and Asda still searching for suitable sites with convenience operators also seeking new opportunities.

Office
Surprisingly, the Belfast office market has shown positive signs of take-up so far this year with a number of office requirements fulfilled. The most notable of these lettings has been our letting of the Obel building to international law firm Allen & Overy, which is relocating part of its London-based operations to Belfast. We have also witnessed a number of relocations, including Grafton Recruitment’s acquisition of 13,000 sq ft of office space in The Boat complex overlooking Donegall Quay, Zurich’s move to Victoria House on Gloucester Street and the Passport Office taking new offices within Law Society House on Victoria Street.  Terms remain competitive and flexible with headline rents falling back from a high in 2007 of £14.50 per sq ft to £12.00 per sq ft in 2011.  Whilst incentive packages are still required, 6-12 month rent-free periods and flexible leases with break provisions are now considered standard. Looking ahead, the outlook for the rest of this year remains positive with a number of private sector requirements to be satisfied. However, the availability of Grade A accommodation has been depleted, which coupled with limited development finance should result in improved rental levels.

Outlook
As we move forward, we anticipate further transactions this year within the investment sector, however, the supply of quality assets will remain an issue. In this respect, what happens within the banking sector and how banks handle their toxic debts will impact significantly on the market overall in terms of the type and quality of product that actually comes to market. In addition, while a reduction in corporation tax may not be the panacea for all our economic woes, it could provide a major boost to the local property market, particularly in terms of unblocking the office development pipeline.  Finally, the retail sector will continue to battle difficult market conditions with further administrations unavoidable and vacancy levels remaining uncomfortably high.