Renewed Interest Brings Market Boost

11 November 2010

The commercial property market continues to face fresh challenges and uncertainties including the potential impact of NAMA and recently-announced public spending cuts, however, a number of significant recent investment transactions and retail lettings point to a degree of normality returning as a round-up of recent activities within the key property sectors reveals.

With over £90 million worth of transacted sales during the last three months, the Northern Irish investor market is poised to capitalize on the return of institutional investors. Although these 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, encourage new buyers and anticipate that lending institutions free up more capital reserves for lending into the commercial property market. 
The Northern Irish office market is set to experience the full impact of the public spending cuts announced last month.  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 Recruitment within The Boat development.

Letting activity within the Industrial sector has been relatively stable during 2010 although 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 fit-outs are becoming increasingly common.

Primarily, capital values for warehousing are under pressure with achieved prices ranging from £20 - £35 per sq ft for existing premises with new- build units achieving £50 - £65 per sq ft.  In looking ahead, it is likely that demand for rental accommodation will continue albeit purchases will be increasingly difficult to finance.

In summary, it is clear that the commercial property market will continue to face substantial challenges going into 2011. However, the current process of re-pricing is necessary in order to stabilise the market and allow the fundamentals of location, value and potential growth to dictate property decisions by both investors and owner occupiers.

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