The challenges in the commercial property market have been well-documented. But how has the market actually performed, and what can we expect looking forward?
The commercial property market and, more specifically, the investment market has, over the last three years, endured a sustained challenge due to Brexit uncertainty and further compounded by our more local issue of the lack of an executive. Whilst all sectors have been in some way affected, the spotlight remains focussed on retail’s problems. By contrast, the office occupier sector has grown in strength, although it too is not without its challenges.
Most recently, we have seen creditors of department store Debenhams back a restructuring plan which will see up to 50 stores close. However, the Company Voluntary Arrangement (CVA), which includes rent reductions as well as store closures, has been described by the joint supervisor of the CVA as “an important step forward for Debenhams” which will “preserve as many stores and jobs as possible”. This CVA could be enough to save what is a long-established household name on our high street.
The impact of online retail on the high street has been a popular subject of discussion for some time now. However, whilst it continues to give cause for concern, is that concern still justified or in any way misplaced? It has been shown that online retail growth rose steadily for a number of years before reaching a plateau and many experts believe that it will continue to maintain this level for the foreseeable future. If indeed this is the case, it would suggest that our high streets have endured sustained hits as a result of the rise of internet shopping but, going forward, our high streets and online retail can co-exist.
We have also just had long-awaited confirmation that the Department of Finance has announced a fundamental review of business rates, albeit ministerial approval will be needed to bring forward recommendations. This will be the first fundamental and comprehensive review of non-domestic rates in the UK. This could lead to welcome news for small businesses as part of the regeneration of city and town centres across Northern Ireland.
Taking a closer look at the investment sector, 2018 proved to be a tough year. At £175 million, the total volume of transactions represented a five-year low. However, if the 2017 sale of Castle Court (£125 million) is removed, the last three years do not look so vastly different and we could easily point to the uncertainty triggered and sustained by Brexit. But we should not ignore the impact of Stormont, the global economic changes and the possibility that this is actually part of the cycle of investment.
2019 is off to a reasonable start with more than £100 million expected to complete in H1 but, even if these volumes continue for H2, it is still some way off the post-recession 2014 figure of nearly £500 million. Any chance of returning to these heights will need a Brexit deal, and perhaps that is finally on the horizon. Combined with a return to Stormont, we could see the investment market return to a healthier place along with a recovering high street.
The buyer trend of ‘flight to quality’ has been sustained through the period of turbulence and we have continued to see strong demand, and indeed prices, for good quality product across all sectors. Furthermore, the sharp yields being achieved in Belfast have led to investors exploring strong provincial towns in order to deliver more attractive returns.
Much has been said about the success of the Belfast office market. Despite the challenging political climate, the Belfast market had a strong take-up of nearly 900,000 ft2 in 2018 which represented a new annual record. The demand from occupiers for Grade A stock accounted for the majority of the annual take-up but this was only possible because of the prior increase in supply. Serviced offices and co-working space have played its part in boosting these figures with Clockwise taking some 30,000 ft2 at River House and with Ormeau Baths doubling its floorspace. The successful take-up in 2018 has inevitably hit the availability and new-builds continued to be driven by, if not reliant on, pre-lets. Quality speculative development is needed in order to satisfy this continued demand. This is evidenced by the recent actions of both Allstate and Kainos, the former who had to become a developer to satisfy their space requirement and the latter who recently acquired the Dublin Road Movie House to build their own building.
Whilst we have endured some tough years, it could be said that many adjustments in the market were needed whether it was the rebasing of retail rental values, repairing of the high street or highlighting the issue with business rates in order to provide relief for small businesses. With a lot of pain taken, a potential Brexit deal in sight and talks re-commenced in order to restore the executive, I expect that many investors will be readying themselves to enter or indeed re-enter the property market. The removal of this uncertainty could substantially unlock the supply shortage and a combination of both could mean more opportunities but at reasonable prices. Maybe it’s too early to be optimistic, but there are good reasons to be getting ready to put commercial property back on the radar.