Economic confidence fuels commercial property growth: A look back on 2014

Bradley Hall, DTZ, GVA and Naylors give us their take on industrials, investment and offices' performance in 2014

A CGI of the Crowne Plaza Hotel under construction at the Stephenson Quarter
A CGI of the Crowne Plaza Hotel under construction at the Stephenson Quarter

Growing confidence in the economy has provided a welcome boost to the North East commercial property markets in 2014, and agents across the region are hopeful it will continue.

Neil Hart, director at Bradley Hall said it has been a strong year, with business growth fuelling continued resurgence in the sector.

He said: “Enquiries are up, confidence is on the rise and deal-making is back in vogue again. It’s hard to believe that only three or four years ago Britain was in the depths of a recession.

“Growth has been achieved on the back of increased confidence in the business community and an appetite for expansion. Companies are winning more orders, increasing their workforce and, in many cases, moving to bigger and better premises.

“The fact that the economy has expanded by 3% in the last year – making Britain one of the best-performing economies in Europe – has fuelled expectation that the commercial property revival can be maintained.”

Despite a buoyant time for the industrial and office markets, challenges have been posed, in particular a marked shortage of Grade A space, sparked by an increase in the number of businesses looking to expand into high-quality premises.

Mr Hart said: “The obvious solution would be to build more Grade A offices – but that’s not as simple as it sounds. New developments can often take a couple of years to get through a convoluted planning process, which is little use when they are needed now.

“In the short term, the shortage of Grade A office space will push up rents but there are still some excellent incentives for people who shop around. In the medium to long term, the region needs an acceleration of new office developments to attract investment and keep the economic revival on track.”

The dwindling Grade A stock has placed Newcastle city centre teetering on the edge of the tipping point in terms of supply and demand, according to GVA.

A spokesman said: “Conversion of existing office stock to hotel use and student accommodation is a further challenge to the supply pipeline as developers and investors re-appraise their property portfolios.

“Development of student housing schemes on office development sites will compete strongly in terms of development viability as a result of funding difficulties relating to the provision of speculative office development within the city centre.”

Simon Taylor, head of office agency at Naylors said: “This year office take up has been far stronger in the out of town market than in Newcastle City Centre and Cobalt in particular has had a spectacular year.

“The supply of large Grade A offices in Newcastle City Centre is very low but there is a healthy supply of Grade B accommodation particularly in the 2,000 to 6,000sqft size bracket.”

Two new build office schemes are, however, now well advanced, including the first phase scheme at Science Central which is being developed by the city council and Newcastle University on the 24-acre former Scottish and Newcastle Brewery site.

Meanwhile, Silverlink Holdings backed by the city council and the North East LEP are now well into construction works at the 10-acre Stephenson Quarter between Central Station and the Quayside.

An artist's impression of the new Maling Exchange in Newcastle
An artist's impression of the new Maling Exchange in Newcastle
 

In Ouseburn, Maling Exchange at Hoults Yard is also under way – and is likely to be very well received.

East Pilgrim Street, a key gateway site to the city centre, could also make a significant contribution to the future city centre office supply pipeline.

In general, Newcastle could face the tipping point before the end of 2015 which may encourage investors, developers and their funders to bring forward new office projects.

In terms of industrials, GVA’s autumn report confirmed demand for large logistics warehouses is positive, despite slow first half year take-up of warehouses over 100,000sqft, which was 18% below the five year six-monthly average at 8.1msqft.

The spokesman said: “Online retail continues to drive change in the industry. Expectations are changing from next-day delivery to same-day delivery, increasing the need for retailers to have a larger number of smaller hubs around the country.

“Much of this is being out-sourced to third party logistics companies but in time retailers may well take this in house.

“Availability of standing industrial stock in the region is diminishing to the point that it could well restrict growth in the region’s economy. There has always been a limited supply in the 100,000sqft plus size range but there has been a good level of take up in the first half of 2014 and it is currently at an all-time low.”

Keith Stewart, head of industrial agency, Naylors, noted a major take up of ‘large sheds’ during 2014, with in excess of 1m sqft being let or sold.

He said: “Most premises that have sat empty since the downturn have now gone which has pushed capital values. Rents have remained steady but incentives have shifted due to high demand and short supply.”

A CGI of Axis 19 viewed from the East
A CGI of Axis 19 viewed from the East
 

Speculative development is emerging in the region – including Hellens Developments projects at Teal Farm and West Chirton as well as MGL Developments scheme at Portobello Trade Park, Birtley, and Northumberland Estates’ Axis 19 at Tyne Tunnel Trading Estate.

However, it’s widely held that the region needs to find a way to encourage developers back to the market to give the region’s manufacturing and distribution sectors the space to grow and create sustainable jobs.

Within property investment, buying pressures seen during the first half of 2014 has returned, marking the end of a largely positive 12 months.

Recent major institutional investment in the city include Standard Life’s £22m purchase of Central Square South, Orchard Street Investment Management’s purchase on behalf of the BBC Pension Trust of Time Central at £24.64m, Aviva’s purchase of 1 St James’ Gate at £18m and Cornerstone Investment Management’s purchase of a mixed office and industrial scheme at Gateway West for £12m.

The GVA spokesman said: “Both buyers and vendors are waking up to the notion that pricing is now in a clear upward channel, with yield compression witnessed across all sectors.

“The key difference between now and early 2014 is that where the first half of the year was marked by a lack of suitable stock to meet investor requirements, the market is now flooded, both in the North East and nationally.

“Arguably, a number of sales are driven by investor fatigue, as those who have held on through the market dip now see the first glimmer of light and seek disposal of heavily asset-managed properties to focus on new opportunities.”

Peter Atkinson, associate director in DTZ’s Newcastle Investment agency team, said: “Over £20bn of deals transacted in the first half of the 2014 alone with UK institutions leading the drive to invest.

“As the economy has strengthened and yields hardened in London and the south east more and more investors have looked to the regional markets. As such the North East has seen a strong turnaround over the last 12 to 18 months.

“With the recovery cascading through the hierarchy of regional cities at a rapid pace the North East is in demand offering comparatively attractive yields underpinned by strong occupational markets and a starved development pipeline.

“These fundamentals combined with planning reform driving alternative use development potential continue to offer opportunities across the full spectrum of the market suited to both value add investors and mainstream institutional funds.”

The Kingsway scheme by UK Land Estates which is radically rethinking industrial space
 

Looking ahead to 2015 and beyond, all the signs are there that the upward trend will continue.

But, warns Neil Hart: “We should guard against complacency. We can all recall what happened in September 2007, when the collapse of Northern Rock signalled the end of the economic boom and the start of one of the worst financial crises in recent history.

“To keep the commercial property revival going, we need the retention of business rate relief in enterprise zones, which would encourage the creation and growth of industry clusters in key sectors such as manufacturing, electronics and software.”

DTZ’s Peter Atkinson concluded: “Looking forward, with a backdrop of the improving economy, the starved development pipeline and improving occupier markets forecast rental growth is expected to maintain a positive trend with further yield compression, also expected in 2015.

“Consequently, in most markets the highest total returns for the near future are expected in regional markets with the North East participating strongly in this.

“One particularly heartening trend in the North East has been the region’s continued evolution as a genuine destination for institutional capital.

“Previously the North East and Newcastle has played second fiddle to the ‘Big Six’ regional cities, but it is now, whilst not considered on a par, certainly not discriminated against as it would have been previously.

“The fundamentals behind this resurgence are very strong and we expect these market conditions to persist into 2015 and beyond.”

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