As we move closer to year end, the buying pressure witnessed during the first half of 2014 has returned, providing a welcome climax to a largely positive year in the North East property investment market.
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.
Prime offices and industrial continue to post new value benchmarks, pushing net initial yields below 7% and 8% respectively for well-located stock let on secure terms.
‘Core Plus’ markets are also feeling the benefit, with the recent sale of Gateway West, a mixed use development on Newcastle’s Newburn Riverside, illustrating this improving demand.
The scheme transacted in October for 8.40%, some 135 basis points better than the asking yield.
Appetite for retail has not caught up fully with the market overall despite some positive indicators, though this may be due to questions which remain over the future of the sector generally.
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.
Institutional funds are also winding down smaller holdings for similar reasons, releasing older investments which no longer fit portfolio criteria to the secondary / prop co market.
This latter mechanism will be a key driver of medium term value in North East city centres as developers take advantage of a derestricted planning framework for converting offices to residential use, effectively removing the bottom end from the market.
Combined with a lack of new office development across the region, there is real reason for optimism as we move into 2015, providing that take up is maintained or improves.
Rental growth in the offices sector is already showing signs of life, sitting alongside an already buoyant industrial market.
The flipside of the new influx of stock is that investors are unable to allocate sufficient resources to all but a few opportunities, and given the weight of money still flowing through the various funds, buyers are typically seeking larger lot sizes, of which the North East can offer few.
Therefore, while Manchester and Leeds collect the lion’s share of regional requirements (aided by the HS2 and ‘Northern Powerhouse’ agenda), the North East region is at risk of gaining a permanent reputation as a secondary location.
Large scale public sector supported projects are the Keynesian solution to economic malaise. The success of the new £250m Science Central and Stephenson Quarter schemes in Newcastle, city centre regeneration plans in Sunderland, the Western Gateway and Middlehaven schemes in Middlesbrough, is therefore critical to improving the regions’ long term visibility and placing the North East firmly on the investment market’s wish lists.
- Luke Symonds, senior surveyor, investment, GVA, Newcastle