Space - The Final Frontier
Commercial property remains a good barometer of the local economy’s health, says John Compton and the recent lackustre demand for retail and office properties suggests that the prognosis is a bleak one
‘At its peak, our industry engaged around 84,000 people and had an annual turnover of £3.2bn,” says Construction Employers Federation boss John Armstrong. “Unfortunately, the Northern Ireland construction industry has not been immune from the worldwide recession.”
Armstrong’s assessment of the state of the construction sector is a judgement on the wider economy.
In a region where construction has hit the buffers, the commercial property market is feeling the pain, with lacklustre demand for both retail and office accommodation.
Fuelled by investors backed by lavish lending and an influx or retail investment, the early part of the decade saw a scramble for development opportunities in the office, hotel and retail sectors.
All that culminated in 2005 when Belfast played host to the BCSC Annual Conference and Retail Showcase.
BCSC, the public face of the retail property industry, brought around 1,800 retailers, developers, asset managers and architects to Belfast, where, according to the promotional material, “ retail jobs are up, confidence has increased and the city is on its way back as a primary retail centre, [where] the next decade will see Belfast realise its full potential as a premier European regional capital.”
Since then, the trend has been less certain. The retail highlight came in March 2008 with the opening of the £400m, 800,000sq ft Victoria Square retail development, and the continued Fraser-Lewis battle between Belfast and Lisburn as to the ultimate fate — and likely location — of the John Lewis department store.
But in the supermarket sector, the store wars continue. Sainsbury’s has 12 supermarkets on the ground, with three more in planning, following the 2009 opening of the Kennedy Centre in west Belfast, where the retailer developed one of the biggest new-build stores seen anywhere in the UK.
Tesco too, seems on a roll with 48 outlets, including its five Extra stores and 12 Express stores, and close to 9,000 employees across the region. Now Tesco is about to go head to head with Asda, as both have plans to develop new superstores in Banbridge.
Supermarkets aside, the commercial property market is feeling the pinch in terms of new development, but the depressed state of the market means there are deals to be done and the institutional appetite for investment property remains reasonably healthy.
Last autumn, Scottish Widows Investment Partnership paid a reputed £48m for the 200,000sq ft Longwood Road Retail Park in Newtownabbey, while the 83,000sq ft Marks & Spencer store in Donegall Place, Belfast, changed hands for a reputed £8.75m. Both deals reported an initial yield of over 5%.
There may also be some hope in the air for the office-accommodation sector. Best estimates suggest that Belfast has planning permission for around 1.3 million sq ft of office accommodation, most of which is on hold, pending an uptake in demand and a loosening of the banking purse strings.
However, a recent report from CB Richard Ellis suggests that there is only around 394,000sq ft of office accommodation completed and available to let in the city; equivalent to just over 12 months average take-up.
The decision of international law firm Allen & Overy to locate 300 jobs in Belfast could swallow 43,000sq ft of space, with lawyer Herbert Smith and Citigroup adding to the short-term demand that could see most of that 394,000sq ft committed inside the next 12 months.
That would be welcome news to John Armstrong and the Construction Employers Federation, but according to PricewaterhouseCoopers chief economist Esmond Birnie, demand would have to increase significantly to redress the recent losses. “In the decade to 2008, unprecedented demand in the construction sector created 16,000 jobs and investment in retail created more than 28,000 new jobs.
“However, in the past 24 months, construction has shed 11,000 workers and 5,000 have gone from retail. And with growth expected to be less than 1% in 2011, the prospects for substantial recovery in either sector are slim.”
Nevertheless, according to CB Richard Ellis, prime office rents seem to be stabilising at around £12.50sq ft, although retail rents remain under pressure. The highest demand for retail accommodation remains around the pedestrianised zone at Victoria Square, with so-called Zone A rents around £186sq ft and secondary rents around £60sq ft.
Adding to the uncertainty, around a third of NAMA’s €4bn portfolio is in Belfast and, with Ireland’s toxic bank preparing to release property on to the market, the impact of this on commercial values remains to be seen.
Consequently, the short-term prognosis for the commercial property sector remains relatively subdued. Fears over public-sector spending cuts, a lack of private-sector activity and continued gloom in the Republic of Ireland’s economy all combine to hit investor confidence. which is a key ingredient for the property sector.
And while continued inward investment in business services will suck-up the available commercial office accommodation, the public sector — traditionally one of the region’s leading tenants — is unlikely to drive demand.