Economic growth is up, unemployment is down, inflation has fallen and following suit the commercial property market has rallied and is beginning to look a lot more positive. The market is virtually unrecognisable from January 2013 with a strong rally in all sectors with nearly all property being offered to the market generating strong interest and going to a best bids closing date.
So what is driving this renewed competition in the market place?
First and foremost it is the improvement in the economic picture which has had a positive effect on occupational markets. The risk of tenants defaulting has reduced and there is an upswing in the number of tenants requiring new space which in turn is applying pressure to rents which in time suggests that all important rental growth is not too far away.
Secondly, the wave of inward investment from foreign investors continues to increase.
For the past two years 80% of all commercial property transactions have been traded to foreign investors. The majority of this activity has occurred in London and the South East but as pricing becomes hotter in these locations, we are seeing a trickle effect into the regions.
There are huge swathes of global capital looking for a home and the UK’s tolerant society, fair legal system and benign political climate will continue to appeal to the ultra high net worth foreign investors.
Thirdly, the upswing in the UK economy and the improved performance of IPD has helped to trigger the UK institutions back into life and our old friends from Standard Life, Legal & General, M&G and Aviva are back and prepared to look at investments in the North East.
Whereas they have focused on defensive stock for the past five years they are now more entrepreneurial in their appetite for risk. In the last quarter we have seen a number of deals which reflect this increase in appetite. Two prime Newcastle city centre offices have changed hands to UK institutions. Both were lot sizes of circa £25m and another city office in Newcastle is under offer to an institution at a sub 7% yield.
Knight Frank have sold an industrial unit let to Brake Bros in Durham for £1,460,000 reflecting a yield of 8.50%. The unit turned a handsome profit for the vendor who bought it for circa £1.2m in 2012 but now, only three months on, the sale is looking like a nice deal for the purchaser.
What has really moved the goalposts in the region in the last quarter is a Government-let office with an unexpired lease term of seven years that has just gone under offer at 10% above the asking price.
The property attracted bids from four London-based institutions and the yield on this property has improved by 200 basis points from where it was 24 months ago.
The next question we need to address is whether this is a new trend on pricing or a temporary blip as markets overreact. We won’t know the answer to this questions for definite for another 12 months or so but given the weight of money in the market currently chasing a limited supply of stock the hardening of yields looks set to continue.
Dickon Wood, partner, investments, Knight Frank