Another Difficult Year For Commercial Property With More Of The Same Envisaged For 2012

01 January 2012

2011 has been a difficult year across all sectors of the commercial property market and although we have seen transactional activity, it is at relatively low levels with substantially reduced values. Closer analysis undertaken by Osborne King reveals how each sector fared during the year.

The Belfast office market has had a relatively positive year characterised by a number of significant requirements and lettings. Early in the year international law firm, Allen & Overy, secured c. 35,000 sq ft in the Obel Building, which is now fully operational while other significant lettings include Grant Thornton and AECOM both securing c. 20,000 sq ft of floor space at Clarence West.

Terms for Grade A space remain attractive although rents appear to have stabilised at £12.00 - £12.50 per sq ft. Tenants are still able to negotiate favourable terms that include flexible leases with break options and rent-free packages.

The outlook for 2012 is challenging, and while a number of requirements remain unfulfilled, a general lack of larger scale occupier requirements (10,000 sq ft+) will hold back growth in this sector. However, availability of new Grade A space is dwindling rapidly with only three key buildings available in the city centre - The Boat, The Soloist and Lanyon Plaza.

The secondary market continues to suffer with tenants downsizing leaving large vacant buildings. Demand remains weak for this space with rents falling to c. £8.00 - £10.00 per sq ft and landlords offering flexible terms to avoid vacant rates and service charge liabilities.

For further information, please contact:

Harry Crosby
T: 028 9027 0019

Despite turmoil in the Eurozone financial markets, we witnessed further investment activity primarily across the retail sector. Compared to 2010 (c. £110 million Sales) investment activity by reference to sales prices is lower at c.£35 million, however, there has been a greater number of sales transacted which is a promising trend.

Institutional activity included acquisitions by LaSalle Investment Management on behalf of NILGOSC in respect of Braidwater Retail Park, Ballymena (£13.8 million) and the sale of Laharna Retail Park and Strabane Retail Parks to a London-based institutional investor. Local investors remain active seeking opportunities typically in the region of £1 - £2 million. A lack of debt funding has resulted in prices continuing to fall with improved investor returns as a consequence.

Going into 2012, institutional investors will continue to seek opportunities that relate mainly to prime, well-secured assets or alternatively investment assets yielding a significantly higher rate of return compared to similar mainland GB properties. Property companies are generally seeking value and are discounting prices accordingly. While we anticipate sustained activity within the investment sector during 2012, a lack of debt finance coupled with limited new institutional investment will be one of the biggest challenges facing our industry. The identification of new sources of funding is critical to ensure growth across all sectors.

For further information, please contact:

Robert Ditty
T: 028 9027 0025

Andrew Coggins
T: 028 9027 0022

2011 was a year typified by depressed retail sales, which translated into reduced demand for retail accommodation and, therefore, stubbornly high vacancy rates. As a result, rental levels remain subdued and in some locations where there is significant availability, these have reduced by as much as 40% - 50% from their peak in 2007.

On the positive front, however, the discount retailers continue to expand across Northern Ireland, and in particular, Home Bargains, Matalan, Argos, Poundland, Discount N.I., Cheque Centre, Card Factory and Pound World continue to be active. The main factor dictating the pace of this expansion is the availability of suitable units. In the retail warehouse sector, vacancy levels remain low thanks to current demand from occupiers including Dreams, Pets at Home, Next at Home and Jollyes.

Unfortunately, 2012 is not likely to see a significant improvement in market conditions with activity levels likely to focus on the discount, warehouse and foodstore sectors. We anticipate that vacancy levels in High Street and shopping centre locations will continue to fall and that this will ease the pressures on landlords regarding rental levels and incentive packages. Still, the reality is that some locations will take a number of years to recover significantly.

For further information, please contact:

Colin Mathewson
T: 028 9027 0003

Restructuring, Enforcement and Insolvency
Since establishing a Restructuring, Enforcement & Insolvency division as in 2010, we have experienced a substantial increase in our workload throughout 2011. A common feature across all sectors has been the lack of finance and willingness to invest in property. The result is a reliance on cash purchasers whether in private treaty sales or auction completions. The effect of this is prices continuing to suffer as purchasers expect discount/value for using cash.

We expect NAMA to have a greater impact on the Northern Ireland property market in 2012. Uncertainty regarding the disposal of assets by NAMA prevails and we expect to see the release of further NAMA assets during 2012. However, we do not share the fears of many that NAMA will flood the market taking the view that the agency will undertake a “managed” release of property assets.

In conclusion, we cannot escape from current market conditions and at best, it will be more of the same in 2012 owing to the scale of issues requiring resolution. The key issues centre on how the banks and NAMA deal with distressed property assets, the availability of finance and government initiatives and measures that might help stimulate movement across each property sector.

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