Investment sentiment is rising across the North East – and it’s not just core sectors that are providing attractive opportunities.
Dickon Wood, partner for investments at Knight Frank, said sentiment across all sectors has improved over the last years thanks to reduced options for occupiers, rising rentals as a result of a shortage of space and a sluggish development pipeline which is still not showing signs of bringing new schemes to the market.
He said: “With easier access to funding, investors are looking at the property sector with renewed confidence and its not just for the traditional office, retail or industrial sectors but for a wider range of investments.
“The continued rise in investor interest in core specialist property reflects the appreciation of these business critical assets which, when bought on sensible rent covers and on sound operational business assets, provide their owners with confidence in the durability of income.”
Mr Wood said that the core specialist sectors such as healthcare, hotels, student property and automotive now account for an ever growing share of the commercial market, a trend which will continue for the foreseeable future.
“The key driving factors include structural changes such as the UK’s ageing population and increase in student numbers, and car sales growth, combined with increased occupier demand for high quality property.”
The Knight Frank Wealth Report’s Capital Markets Survey show very wealthy investors are now looking beyond prime or trophy offices and retail space as a safe haven for their funds and are prepared to look up the risk curve to non-core locations.
Mr Wood added: “The squeezing of yields within the ‘traditional’ sectors such as retail and offices has also prompted investors to look at assets which offer better returns, not to mention opportunities for diversification.
“This year will see a sharp increase in deal volumes for specialist property, along with rental growth and further yield compression.”
Luke Symonds, senior investment surveyor at Bilfinger GVA’s Newcastle office, added: “The North East investment market now truly seeing the benefit of yield compression elsewhere.
“Industrial pricing continues to forge ahead and well-located, multi-let estates around the A1 or A19 are now pushing yields well below 8%.
“Kingsway Interchange, a prominent estate on the ever popular Team Valley, is a good barometer for this sector and attracted strong interest on a national scale.
“Landlords will eagerly await details of the transaction to inform decisions surrounding the sell button on their own holdings, though the forthcoming General Election may place a halt on proceedings temporarily.
“The offices market’s current strength is focussed more on locations north of the River Tyne, with both Newcastle city centre and Cobalt Business Park in particular witnessing increased occupational and sales activity.”
Strong demand for space in the city has seen over 200,000sqft of Grade A and good secondary space taken off the market in the last 18 months, alongside a number of high profile conversions to residential and hotel use.
Barclays House on Grey Street was rather controversially granted consent for student accommodation, and the prominent Hampton by Hilton hotel conversion of Barron House opposite Central Station has now been completed.
Close to half a million square feet of office space has been converted to alternative use over the last five years and with a Grade A supply pipeline of just 35,000sqft at the Stephenson Quarter scheme, the resulting squeeze is driving up asking rents and pushing incentives back, creating an attractive market for investors where asking prices are rarely off the mark.
Mr Symonds said the recent sale of Nexus House on St James’ Boulevard – for 6.75% net initial yield – is evidence of confidence in the city’s prospects moving forward, with the Science Central development at Gallowgate placing new focus on the western fringe as a key commercial location.
He added: “Moving forward, there is an air of optimism in the market and the salient view among fund purchasers and small investors alike, is that the uptrend in the current cycle has a way to go.
“Driven by all-time highs in equity pricing and debt markets finally easing, there remains a weight of money allocated to property and the North East is well-placed to capitalise.
“This begs the question whether the region’s long-awaited growth may have come sooner were it not for the Government’s decision to defer the rating revaluation from 2015 to 2017, a move which Bilfinger GVA estimate has cost businesses in the North and Midlands £2.3bn, while saving London £1.5bn.
“A sensible revision of the rates system is vital for the North East to protect its fragile economy and redress national imbalances.”