The first quarter has borne witness to a marked improvement in the regional commercial property investment market, with demand at its strongest since the zenith of early 2007.
This is due to a number of factors. Most encouraging is the return of confidence to business on a national scale. Backed by unemployment falling to 7.2% and upwards revisions to GDP forecasts, there are indications that the recession may finally be behind us.
Commercial property as an investment class is showing signs of stability once more, with institutional and fund money rotating into the sector in light of cooling equity markets and stagnant bond yields. For private investors, the Government schemes to incentivise home ownership have created a feel-good factor for bricks and mortar generally, boosting both the lower end of the market and the coffers of REITs, who now have a weight of money to spend.
The regions are also finally benefiting from an overheated South East market. Yield compression in London has led investors to seek higher returns outside the M25 and although this is confined largely to prime property with blue chip income, there are only so many trophy assets. Requirements must therefore scale down to smaller lots or secondary stock to satisfy investor appetite.
Quantifying price movement is difficult, though across good secondary offices and industrial it is a safe bet that yields have hardened over the past six months. This is exemplified in the sale of Time Central on Gallowgate in November, exchanging for £24.35m at a yield of 6.15%.
Prior to this, the top deal in the city centre was 1 Trinity & Stockbridge House at 6.75%, in the summer of 2010. Likewise, industrial yields have hardened, with 8% now an established benchmark and “big box” distribution warehouses – a strong growth sector – edging towards 6.5% for longer term income. There are concerns, however. While investor demand has improved dramatically, the occupier market has to catch up. Caution pervades in the North East, particularly in the retail and secondary office sectors.
Positively, a lack of speculative development in recent years is resulting in a shortage of supply in specific sectors, namely industrial and city centre offices; at current take-up levels Newcastle city centre has only nine months of Grade A office accommodation remaining, which may push occupiers into older stock.
The focus must be on growth. The Budget was positive in the main. The North East needs to embrace this and work to its strengths in manufacturing, car production, energy, offshore services and shipping to attract further major investment. Hitachi’s new carriage production plant in Newton Aycliffe and Nissan’s continued expansion in Sunderland are evidence that the skills and expertise of the region are highly valued on the international stage.
Luke Symonds, MRICS, National Markets – Investment, GVA Newcastle