Newcastle city centre has grown organically around the outskirts of the traditional Grainger town area and the prime retail pitch of Eldon Square and Northumberland Street, writes Simon Beanland of GVA.
A new area of office development was brought about in the early1990s with the successful regeneration of the Quayside followed by schemes at Citygate, St James’ Place, Central Square and Gallowgate, all developed off the back of a strong pre-letting market.
Speculative development in the city at any point in the cycle has been limited and as a result the balance of supply and demand has been well managed.
The newly-commenced Stephenson Quarter is the focus for new development in the city funded by Aviva Investors. The first phase includes a Crowne Plaza four-star hotel, 360 space multi storey car park and 35,000 sq ft of Grade A offices due to be completed in 2015.
With only 35,000 sq ft of new Grade A accommodation under construction and significant recent take up of comparable space, it is expected this will exert further upward pressure on rents. Beyond 2015, there are several sites which have been identified for development, some of which have outline planning permission totalling in excess of 500,000 sq ft. However, it is unlikely any such schemes will be started prior to 2016 and without pre-let.
During the downturn incentives increased. However prime headline rents only marginally fell and with no new supply this has started to drive recovery in the letting market for Grade A space.
Rents for prime grade A space are now between £20 and £21.50 per sq ft and expected to rise. These levels compare favourably with Leeds (£25/£26 per sq ft), Manchester and Birmingham (£30/sq ft) and Edinburgh (£28/sq ft).
Demand for regional office investments has dramatically increased in recent months with domestic institutions and overseas funds increasingly focusing outside of Central London in order to avoid strong competition from High Net Worth overseas investors and to access high returns and take advantage of improving market conditions. Core regional office yields are now around 6% or better in the larger regional centres.
Newcastle is of strong interest to UK institutional investors, with many prime assets in the city centre owned by institutions including Standard Life, AVIVA, Legal & General, Prudential, LIM, CBREGI as well as foreign investors such as Danmerc. The strong supply and demand dynamics in the prime office market continue to make the city an attractive proposition.
The market in Newcastle has historically traded at 25–50 basis points discount to the four largest regional centres. Prime yields in the city centre peaked at 4.6% in early 2007. Along with national property investment markets, yields drifted through 2008 and 2009 but have since rallied and prime office yields have now returned strongly in line with other regional centres.
The marketing of Time Central in October 2013, an 83,436 sq ft 2008 build, Grade A office building on the Gallowgate has demonstrated very strong investor demand. The property is let principally to Brewin Dolphin and Muckle Solicitors, both paying rents based on approximately £19 per sq ft with car parking at £1,670 per space pa. The property was acquired for a figure of £24.35m reflecting a net initial yield of 6.15%.
Simon Beanland,senior director, Investment, GVA, Newcastle