For all the challenges of 2021, the commercial property investment sector recorded its highest annual volume since 2017. At £317.7m volume was almost double that of 2020 when we spent a significant proportion of the year in lockdown. 2021 was buoyed by the £87m sale of Merchant Square, but nevertheless investment activity (based on number of deals) returned to pre-pandemic levels.
Following on from the 2021 performance, the beginning of 2022 has been equally healthy. The opening quarter is typically quieter. Q1 2022 volume of £83.4m was 30% above the five-year quarterly average and the highest Q1 total since 2016. The sale of Boucher Shopping Park at an estimated £40m accounted for half of the first quarter volume, but the number of deals remained on average indicating a steady level of market activity.
At the mid-point of Q2, there is approximately £60m of deals completed/agreed/in legals. While some of these deals may roll into Q3, at this stage there is plenty of interest in Northern Irish commercial property and we’re on course to surpass volume of the years preceding the COVID-19 pandemic.
Northern Ireland appeals to a wide variety of investors and is appealing more and more to international investors, as evidenced in recent years by the significant purchase of Merchant Square by the Middle Eastern Albilad Capital and Abbey Retail Park by Canadian Slate Asset Management. That said, it is the private local investors and local propcos who are the stalwarts of the market. Both of whom remained active during the pandemic years.
The challenges that have faced the retail sector in the last two decades are well documented. That said, retail investment is the mainstay of the Northern Irish commercial property market and, with the exception of last year, retail consistently accounts for the largest proportion of annual market share (approximately 56% over the past five years). Pre-2018, shopping centres accounted for the majority of annual retail volume but in more recent years investor focus has turned to retail parks and retail warehousing (approximately 62% of retail volume over the past five years). The COVID-19 pandemic accelerated this change as consumers sought the open space and car parking characteristic of shopping parks, over city centre shopping centres, making retail parks the most resilient retail sub-sector.
The office investment sector is more prone to supply issues than the retail sector. On average, office volume has accounted for a fifth of volume over the past five years. The pandemic has undoubtedly affected the office market with the shift to working from home and subsequently companies making more permanent changes to their working patterns and physical locations. Despite these changes, it is clear that both prime, and secondary offices with redevelopment potential, continue to appeal to a range of investors. The £87m purchase of Merchant Square by Albilad Capital secured office the top sector spot for 2021, the first time on record, and demonstrated the appeal of prime offices to international investors. With staff returning to offices (even on hybrid working terms) and the new developments that have either recently completed or are soon to complete in Belfast, there is definite potential for further significant deals in the near future.
The standout sector across the UK during the past two years of COVID-19 has been industrial sector; any uncertainty brought to the market by Omicron was certainly weathered by this sector. Northern Ireland has also experienced strength in this sector, with the £27m sale of an Amazon distribution warehouse at the end of 2020 and £35m volume in 2021, 28% above trend. Industrial has had a strong start to 2022 with over £13m of volume in Q1, 72% above the quarterly average. While investors continue to seek industrial assets, activity continues to be hampered by a lack of available stock.
The living sector typically fluctuates due to a dearth of supply but was reenergised in 2021 with over £30m of deals, primarily within the health sub-sector. Care homes and health centres featured in the 2021 deals and continue to be attractive to a variety of investors wishing to diversify including REITs and local investors. With the completion of significant student housing and the boom in big name operated hotels in Belfast in the last decade there is the potential for significant growth in this sector.
The investment market is accustomed to local political tribulations and is largely unaffected by it. However, political stability and a well functioning Executive with a focus on investment, attracting new business to the region, well thought out development and greener buildings can only enhance Northern Ireland’s attractiveness to investors both locally and internationally.
The global political landscape and current economic climate are of greater concern. The war in Ukraine, Brexit, rising interest rates and inflation, and the cost of living are all playing into the investor decision-making process. Positively, unemployment rates are low and GDP has grown (though from a low base).
Overall, the Northern Irish market is in as good a position as we could hope as we emerge from the pandemic, although we’ve not quite yet returned to ‘normal’ market conditions. With two of the three main core sectors, retail and office, most affected by lockdowns the impact upon investor sentiment and activity is undeniable. That said, investors are showing returning confidence in these sectors, particularly retail parks and with office supply beginning to pick up.
We expect to see continued improvements in the market and better supply will bring about improved volumes. Given the economic challenges, investors are more mindful, and seeking professional advice, when evaluating potential opportunities. Some opportunities will look more attractive due to the cost of build exceeding the purchase price (as has been the case for some time) and others through asset management or repositioning. COVID-19, and the related uncertainty, was a market shock but, as we turn the corner, investors are returning to the commercial property sector with the knowledge that the worst is over and they can prioritise certain sectors or, more likely, simply factor in market risks and uncertainty into their pricing.