COMMERCIAL PROPERTY SECTOR BATTLES ON
22 October 2012As we enter the final quarter of 2012, the effects of the current recession continue to percolate through all aspects of the commercial property sector. It would appear to be a perfect storm with a lack of bank finance, further insolvencies, reduced business activity and a severe squeeze on consumer spending conspiring to drive values downward across all sectors. Add to this the issues surrounding vacant rates and lack of resolution regarding corporation tax proposals and you can see why commercial property no longer has the appeal that it once had. However, even if green shoots are not visible just yet, all is not lost as a snapshot of "highlights" occurring across most property sectors reveals.
In the retail sector, vacancy levels place Northern Ireland as the worst performing region in the UK while rates are proving a massive burden for occupiers and landlords with vacant property alike. However, positive activity continues with the retail park sector in particular experiencing robust demand with recent lettings including Pets at Home at Sprucefield, Rushmere and Ballymena along with DFS at Londonderry, Costa Coffee at Newry and the former Dekko unit on Boucher Road now leased to furniture retailer, Uno.
The high street continues to fight vacancy levels although the run up to Christmas has seen a reasonable take-up of vacant space albeit mainly on short-term tenancies. The discounters continue to dominate the sector, but a few key openings by H & M, Cath Kidston, Internacionale, Trespass and Hoi Polloi have all added to the mix.
In the office market demand remains patchy, however again recent transactions indicate reasonable levels of activity. The key issue in the office sector remains the future pipeline of Grade A buildings with no new schemes appearing likely to come out of the ground in the short to medium term. This will have a direct impact on any benefits that could be secured from a reduction in corporation tax should a positive decision be announced in that regard. It may, however, provide an opportunity for landlords to refurbish existing space and secure new lettings.
Landlords should also see an increase in rental levels as supply levels reduce and tenants compete for the last remaining Grade A space. This year has seen a number of significant lettings with companies including Pharmalink Consulting, Cyber Source, Devenish, AXA, A & L Goodbody, HP, CME Group, Allen & Overy, The British Council and Grant Thornton all acquiring city centre space totalling almost 80,000 sq ft cumulatively.
Cash buyers who are able to exploit their position continue to dominate the investment market and seek prime assets reflecting value for money. The first half of 2012 saw the acquisition of Castlecourt Shopping Centre by Hermes (£135 million) and Sainsbury's, Londonderry (£18 million) by LaSalle Investment Management, Faustina Retail Park, Londonderry (£17.5 million) by Metric/USS and the Tescos in Lisburn (£30 million) and Limavady (£6.25 million) by CBRE Global Investors. Several other funds still have active requirements for prime assets in Northern Ireland. Meanwhile, a number of smaller assets introduced to the local market are receiving healthy levels of interest from cash buyers who recognise the excellent returns from property compared with other investment sectors.
In conclusion, the commercial property sector battles on and no doubt will face further challenges over the coming years. There is no doubt that values are now re-basing significantly with rents across all sectors now well back from their peak. The key issues going forward will be the speed of the economic recovery, the availability of bank finance to stimulate growth, and of particular relevance to Northern Ireland, any reduction in corporation tax that our politicians may secure in order to encourage further inward investment and development. We can only hope that the perfect storm recedes sooner rather than later so that a genuine and sustainable recovery can get underway.