Commercial Property Outlook 2010

10 January 2010

2009 was a challenging year for the commercial property market in Northern Ireland, with a relatively low level of transactional activity across all sectors. However, confidence is returning and some improvement was evident in the latter stages of that year, in particular within the investment and retail sectors. We expect this to continue into 2010 with the rate of recovery modest, due to the lack of bank finance and the limitations this will place on development and trading opportunities.

The retail market experienced an unsettled year during 2009, which was most apparent with the high profile demise and re-structuring of a number of well-known brands. However, it is accepted generally that the sector showed real signs of improvement during the second half of the year with a raft of lettings taking place and vacancy levels across the province decreasing significantly. Although rental levels remain depressed and it is certainly still a tenant’s market, an increase in transactions is a healthy sign and it is anticipated that this improvement will be reflected in 2010 with an improved retail environment.

As with previous years, the influx of southern shoppers at Christmas has delivered a significant boost to the retail sector and in particular to the supermarkets and “big ticket” retailers including the electrical retailers, Smyth’s Toys and Argos. The penetration of this business into the province has increased beyond the main border towns and cities, with Belfast city centre also benefitting from the additional Euro business.

The most significant trend during 2009 was the arrival of the discounter retailers to the province. During the year, B & M Bargains, Poundland, Poundworld, Ethel Austin and T J Hughes all committed to new stores across the province and have been received warmly by the consumer. T J Hughes has taken a major unit at Cityside Retail Park, which is due to open in March 2010. In addition to the discounters, the key opening in Belfast city centre was Hollister at Victoria Square, which has been a major attraction and one of the main reasons for southern Irish shoppers to visit the city centre this Christmas. Republic have also confirmed that they will be opening their first store in Ireland shortly in the unit formerly occupied by Zavvi in Castlecourt at Royal Avenue.

Pic: Poundland

It is anticipated that the discounters' appetite for new units throughout the province will continue into 2010 although the main limiting factor in achieving this may well be the availability of suitably sized units.

A key issue during 2009 has been the re-alignment of rental values across all retail centres both in and out of town. This has been a painful exercise for landlords, but most have worked hard to overcome vacancies and have retained key tenants where possible. In the current economic climate, and in particular the current banking environment, cash flow and therefore rental income has been crucial to landlords.

The outlook for 2010 in the retail sector appears positive with increased tenant demand and lower vacancy levels now apparent. Although challenges remain for landlords in terms of rental levels and incentives required to secure tenants, the market appears to have mainly stabilised. While 2010 will still be a year of tenant opportunity, landlords are now regaining some ground and demand is apparent across most sectors.

Colin Mathewson - Osborne King T: 028 9027 0003

The office sector, which had experienced strong growth in both capital values and rental levels 2007/2008, has slowed despite an increase in requirements. A number of high profile office developments including Obel, The Boat, Clarence West, The Soloist and Lanyon Plaza either reached virtual completion in 2009 or will be completed in early 2010. Prime rental levels had achieved £15.00 per sq ft, however, due to the availability of new schemes and financial pressures upon developers, rental levels have fallen back to headline rents of c. £13.50 per sq ft. On the other hand, a number of newly refurbished prime office suites are due to come to the market in 2010 with quoting terms of £15.00 per sq ft.

Pic: Obel, Donegall Quay

We currently estimate that the Belfast office market comprises 350,000 sq ft of available space with a further 300,000 sq ft becoming available in 2010 and approximately 1,000,000 + sq ft in planning, however, it is unlikely that this will be developed in the short term due to current stock levels and lack of available finance.

As highlighted, the number of active requirements increased notably in the fourth quarter of 2009, which is a positive sign for 2010. Despite budgetary constraints, the public sector has a number of large scale office requirements most notably Northern Ireland Water and the Public Health Agency as well as smaller requirements province-wide whilst the private sector continues to have smaller requirements of up to c. 10,000 sq ft, but primarily in and around Greater Belfast. As a result, both sectors are able to achieve competitive rental and leasing terms and we are aware of existing landlords negotiating on existing terms in order to ensure continuing occupancy. However, it remains essential that landlords take advice to ensure maximisation of existing lease terms including rent review uplifts.

Outside the city centre demand for owner occupation has suffered due to the unavailability of finance and whereas values had reached £300.00 per sq ft, capital values have reduced to around £200.00 per sq ft.

Despite the intentions of the Bain Report to encourage public sector relocation outside Greater Belfast, there has been limited uptake owing to a shortage of quality office accommodation and the difficulties developers have had in securing finance, particularly for speculative development. In our opinion, speculative development whether in Belfast or further afield is unlikely for the next few years simply due to financial constraints.

In conclusion, it is positive to see an increase in the level of requirements, which hopefully will result in a take-up in existing stock, however, we envisage that the office letting market will continue to be testing in 2010.

Gavin Clarke - Osborne King T: 028 9027 0031

The industrial sector has experienced another very challenging year. Average capital values have stabilised, however, rents have decreased, yields have moved out and land values have dropped further.

There is now a wide disparity in industrial rents across the country ranging from under £1.00 per sq ft up to c. £4.50 per sq ft. This is dependent not just on the location but also on the landlord. The impact of vacant rates and the increasing surplus of available stock have meant that landlords are more prepared to do more attractive deals; therefore the market has given prospective occupiers a range of options on both quality, price and length of lease.

Large industrial sales have been rare. We are aware of large industrial complexes selling for c. £120,000 per acre (excluding the buildings on site) in Ballymoney. The 286,000 sq ft Sanmina Electronics Factory at Ballinderry Road, Lisburn set on 10 acres was sold for £3.5 million in the last quarter of 2009.

Pic: Randalstown Road Business Park

At the height of the market, industrial land in Greater Belfast was selling well in excess of £1 million per acre and in a wider Northern Ireland context, in excess of £500,000 per acre with capital values in excess of £100 per sq ft. Capital values now range from c. £40 to around c. £75 per sq ft for new/nearly new stock with older stock as low as c. £20 per sq ft, but again there have been very few actual sales. Average industrial yields now range between 9% - 10%, although there were few actual sales in 2009.

The letting side is slightly more encouraging. Osborne King has negotiated c. 40,000 sq ft of lettings in three units in Mallusk over the last six months with another c. 50,000 sq ft under offer at present. We have also let c. 20,000 sq ft of small workshop/storage units in Derriaghy Industrial Park, Dunmurry. The park comprises a total of c.150,000 sq ft of 1960s/1970s buildings, which provides small units offered on economical rents and flexible lease terms from one to three years are filling a gap in the market created by the current economic downturn. The traditional industrial centres of Mallusk and Duncrue continue to have a range of vacant units available as well as a high level of leasehold transactions.

The outlook for 2010 is challenging. An easing of fiscal constraints on lending by the banks would be a welcome boost. On balance, we do not foresee a significant uplift, but a stabilisation on 2009 levels is likely.

Chris Sweeney - Osborne King T: 028 9027 0032

There is no doubt that for much of 2009, the banks' lack of liquidity meant that they had limited funds available for property investment, and this coupled with a drop in the value of assets and related loan to value issues left few people in a position to invest. In recent months, we have noticed a shift in sentiment as some investors who are not restricted by a lack of bank finance have come back into the commercial property market tempted by the opportunity to acquire good-quality product at competitive prices and attractive yields. Institutional investors, pension funds, trusts, cash-rich private companies and individuals are taking advantage of the fact that some sectors of the market, particularly prime property, have experienced a bottoming-out of yields and are injecting capital once more into this sector.

Allsops, one of the UK’s leading auctioneers and property consultants, reported total commercial auction sale proceeds for the year as amounting to £446 million, which was a 30% increase on 2008 sales figures. The company attributes this increase to a combination of cash-rich buyers coupled with a restricted supply of properties and realistic pricing, which it claims helped to stimulate sales during the past year.

Closer to home, we are seeing a distinct resurgence as private local investors seek good-quality stock. Most recently, a number of sale and leaseback opportunities brought to market by one of the province’s main clearing banks shows that that strong prices are still achievable - indeed, some of the deals in which we have been involved in 2009 support this theory. Notable deals include a local investor’s acquisition of premises within a landmark new town centre scheme in Barking, Greater London in a deal worth £5.3 million, the sale of a property currently let to M&S Simply Food in Coleraine for over £1.75 million and a Sainsbury's foodstore in south-east England for £6.1million. Price yields for these long-let, blue-chip investments typically range between 5-6%.

Pic: M&S Coleraine

While there has been a notable increase in investor appetite during the last quarter of 2009, this has mainly been restricted to long-let prime investments. Investors owning assets in other sectors are having to focus extremely hard on managing their assets in order to maximise returns. Now more then ever is the time for sound advice and strategic asset management, an area in which we as a firm have been extremely proactive over the past few years.

As banks enter a new financial year, some may opt to clean up their loan books in order to start afresh in 2010, which in itself could bring further opportunities to the market. After all, we should not lose sight of the fact that property historically has been and looks likely to remain a preferred asset class and, as such, is a solid investment vehicle for those who have access to funds.

Andrew Coggins - Osborne King T: 028 9027 0022

There is little doubt that the leisure sector has been affected by the current economic climate over the past year. A combination of job losses and a decrease in disposable income has had a knock-on effect with many licensed premises having to survive on weekend trade. However, many pub and bar owners have risen to the challenge by introducing promotional offers such as meal deals for £6.95 in order to attract customers through the door.

The hotel sector in Belfast has also had a difficult year with occupancy levels dropping and many had to resort to very aggressive pricing in order to generate business. While it is good to see four new hotels opening within the Greater Belfast area including Premier Inn, Lisburn, Ramada Encore, Cathedral Quarter and the Ibis Hotels at Castle Street and University Street Belfast, it is even better for the customer in terms of offering an abundance of choice. Hopefully, demand will grow during 2010 as there is little doubt that Belfast now offers a wide choice of hotel accommodation in first class, purpose-built hotels.

Pic: The Wildfowler Inn

During the second half of the year, the recession appeared to bite hard with eight or nine licensed properties sold under receivership with the banks appearing to take the view that since the economy was unlikely to take a sudden upswing, forced sales were the only way forward.

On a more positive note, sales did occur during 2009. For instance, Osborne King negotiated the sale of a portfolio of five licensed properties to Bill Wolsey whose long experience within the trade has stood him in good stead. Other sales during the year have proved that a market still exists for good properties. All in all, there is no doubt that opportunities exist and for those with the energy, experience and vision, 2010 may well be a good year to acquire property within the licensed trade.

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