Commercial Property Overview – October 2010

11 October 2010

Although the market continues to face new challenges and uncertainties including the potential impact of NAMA and the extent of imminent public spending cuts, a number of significant recent investment transactions and retail lettings point to a degree of normality returning.

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 an improvement on ’09 levels. The overall net effect is that landlords are having to be very realistic and imaginative in terms of filling vacancies and securing tenants by offering enhanced rental packages and lease terms. Notable recent lettings include White Stuff, Peacocks and Guess, all within Belfast city centre.

Nevertheless, demand still exists for retail space notably from the discount operators as has been well documented in the press. Over the past year, 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, opening its first store at Longwood Retail Park, Newtownabbey. Similarly, discount fashion retailers including Peacock, New Look, T.J.Hughes and Primark are all performing strongly and actively seeking expansion opportunities province-wide. Recent financial reports published by these retailers indicate that this is currently an immensely profitable and high-growth sector within the general retail market.

Out of town, we have witnessed a fair degree of activity during the first three quarters of 2010 with French sporting goods retailer, Decathlon, opening its first store in Ireland at Holywood Exchange outside Belfast, which was closely followed by the letting to Bhs Home of a c. 28,000 sq ft unit scheduled to open prior to Christmas.

Meanwhile, 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 and construction is about to start on a new Lidl store. Elsewhere, Longwood Retail Park, Newtownabbey, is now fully let with recent lettings to Home Bargains, Dreams and Creations. The long-running John Lewis/Sprucefield saga remains a topical story and the burning issue for those concerned is the continuing delay in hearing the planning inquiry by the Planning Appeals Commission. The PAC will then make a recommendation on the revised planning application submitted by the developers, the outcome of which could still be challenged.

It has also been business as usual for the foodstore sector with Asda, Tesco and Sainsbury’s continuing to expand along with Lidl and the convenience store sector. Cross-border trade is clearly diminishing mainly due to some re-adjustment of prices south of the border coupled with exchange rate 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 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 both here and throughout the UK. The increase in VAT scheduled for January will test retailers who will most probably try to absorb all or some of the increase in order to remain competitive at the expense of profit margins.

Colin Mathewson - Osborne King T: 028 9027 0003
The Northern Irish office market is set to experience the full impact of Government 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. Apart from a limited number of smaller office requirements in a number of provincial towns, it would appear that Government is committed to actively seeking ways of achieving best value in terms of its existing office provision and that future growth in this market will be dependent on the private sector.

There is 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 including Lanyon Plaza, Obel, The Boat and Clarence West are still seeking occupiers. 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. Headline rents across Northern Ireland still compare favourably with Dublin and other UK regional cities. The most notable recent letting in Belfast has been Osborne King’s letting of 13,000 sq. ft. to Grafton International within The Boat development.

Gavin Clarke - Osborne King T: 028 9027 0031

Although letting activity during 2010 has been relatively stable, rents have continued to be under pressure. Recent lettings in Greater Belfast include Magowan Tyres (15,000 sq ft), North Eastern Education & Library Board ( 6,000 sq ft) and Twinings Tea (11,000 sq ft) all achieving c. £4.50 per sq ft, however, additional incentives including internal fitout are becoming increasingly common.

Primarily capital values for warehousing are under pressure with achieved prices ranging between £20.00 - £35.00 per sq ft for existing premises with new-build units achieving £50.00 - £65.00 per sq ft. Looking ahead to 2011, it is likely demand for rental accommodation will continue, however, purchases will be increasingly difficult to finance.

Chris Sweeney - Osborne King T: 028 9027 0032

With over £90 million worth of transacted sales during the last three months, the market is poised to capitalise on the return of some institutional investors into Northern Ireland. While the institutions have focused predominantly on mainland UK, they are also re-investing in Northern Ireland as evidenced by the recent sale of Damolly Retail Park, Newry to London-based Metric Property Investments plc for £34.9 million reflecting a net initial yield of 6.25%. In August, the vendor of Damolly Retail Park, Corbo Properties, also completed the sale of 48-54 Donegall Place, Belfast. CBRE Investors acquired the 83,000 sq ft property, which is let to Marks & Spencer plc, on behalf of an international institutional investor for £8.75 million reflecting an initial yield of 5.25%.

Scottish Widows Investment Partnership (SWIP) announced that it had purchased Longwood Road Retail Park at Newtownabbey on behalf of Scottish Widows Unit Fund (SWUF Ltd) from Corbo Properties for £48 million. Osborne King represented the vendor in all three of these recent sales.

These sales highlight the fact that investors are basing their acquisition decisions focusing on quality, income-producing stock offering stable yields. 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. This should encourage new inward investment during the coming months. As we approach 2011, the main challenge is to build on the momentum of recent sales and encourage cash rich institutions and property companies to continue to consider further investment opportunities in the Province.

Robert Ditty
T: 028 9027 0025

Andrew Coggins
T: 028 9027 0022

The licensed trade has not improved during 2010 as the current economic climate continues to impact on business. Publicans are facing intense competition from supermarket off-sales, which coupled with increasing levels of job insecurity is having a detrimental impact upon their businesses as customers adjust their spending patterns accordingly. It is therefore not surprising that an off-sales retail outlet on Belfast’s Grosvenor Road, which was sold recently by Osborne King to Wineflair, attracted a lot more interest than many pubs, which are on the market.

The hotel sector is also experiencing tough times with many hotels forced to discount room rates in order to attract business. For the sake of the industry, however, it must be hoped that this situation does not last too long and lead to widespread closures as has been the fate of the well - known Highways Hotel in Larne, which ceased operating recently. On the plus side, there is little doubt that opportunities to acquire licensed premises are available and that there has never been a better time to buy.

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