Belfast Telegraph

The office market has had its fair share of problems but there's light at end of tunnel

Property watch

By Rory McConnell

Markets dislike uncertainty, and the property market is no exception. Right now Northern Ireland has uncertainties by the spadeful which clearly makes for a challenging market.

For one, there is Brexit. Will it be good or bad for Northern Ireland? Corporation tax is another. Will the promised reduction to 12.5% ever happen, and will it be too little too late?

We also have Trump. Will the new US administration continue to encourage foreign direct investment (FDI) into Northern Ireland?

Then there's our local political vacuum; and to cap it all, a Westminster election. Will a strengthened Conservative government really care about Northern Ireland?

But it's certainly far from being all doom and gloom… indeed, the latest Royal Institution of Chartered Surveyors (RICS) and Ulster Bank Commercial Market Survey for Northern Ireland suggests that occupier and investor demand are both rising. According to Invest NI, Northern Ireland is now the number one destination city globally for financial services technology projects, and there is a steady stream of FDI making its way across the pond to set up offices in Belfast.

All of these new jobs need somewhere to work, and, as a result, the office market is probably the most exciting of all the property sectors in Northern Ireland just now.

A combination of high demand and low supply has led to an unprecedented rise in rentals. Grade A office rents in Belfast are now headlining north of £20 per sq ft.

Even after stripping out incentives offered by landlords, the underlying prime rental tone is in the high teens.

These numbers represent a 40% increase in the levels seen even before the crash, and it is encouraging to note that demand is coming from a wide variety of sectors, and includes both indigenous and national companies, and FDI.

Belfast city centre office take-up in 2016 was the highest in recent years at 435,000 sq ft - 40% more than in the previous year, and some 25% ahead of 2014.

Whilst 2017 has started off in a slightly more subdued manner, this may be due to a combination of short-term uncertainty and acutely low supply.

Notable recent deals include KPMG (39,000 sq ft at The Soloist, Lanyon Place); Axiom (26,000 sq ft at Lincoln Buildings, Great Victoria Street), and HCL (13,000 sq ft in Millennium House, Great Victoria Street).

With very few new build or refurbishment completions scheduled in the city centre this year, we expect the market to tighten further.

However, the rate of rental growth we have witnessed recently is unlikely to be sustainable and we expect rents for true Grade A product will level out in the low £20s headline during 2017.

There has been some resistance, particularly from local professional firms, to rentals approaching the £20 threshold. This is perhaps understandable, given that nothing has gone much higher than £12.50 for years.

We have a bit of an education challenge to persuade firms that property costs here are still comparatively low and, in the overall scheme of things, a £5 per sq ft increase for an organisation employing say 30 people, represents less than the cost of one junior member of staff.

On the edge of Belfast city centre, Belfast Harbour is forging ahead with its City Quays developments. CQ1 is fully occupied, and work on CQ2, another 95,000 sq ft of Grade A offices, is well under way.

The Harbour Commissioners, who are in the enviable position of having both the land and the financial resources to undertake speculative development, have proved the point that Invest NI make - if you build the offices, the tenants will come.

Despite a lack of debt finance, there are a few private sector schemes now under construction, and our expectation is that whilst the office market in 2017 may remain muted, there is light at the end of the tunnel.

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