Brexit continues to overhang the market

February 4, 2019

A wait-and-see approach to commercial property remains the order of the day at this early stage of 2019, as Brexit looms large on the horizon, reports Chris Dobson

Simon Beanland, head of Investment at GVA, Newcastle, says that: “Many investors will adopt a wait-and-see approach in the first quarter as a clearer picture of Brexit becomes apparent.”

With low supply and robust demand continuing to put downward pressure on industrial yields, albeit at a slower pace, he says: “There continues to be investment although there is some nervousness over the depth of occupier demand.”

Simon continues: “Investors will continue to scale back their retail exposure as the sector battles with the structural shift towards online shopping. On the back of this, retail yields continue to move out whilst capital value growth is expected to remain negative over the next two years. This will create significant redevelopment opportunities for investors willing to take on risk.”

The weakening of the pound will continue to create a “good value environment” for overseas investors, although Simon adds: “We have already seen a drop off in their exposure outside of central London.

“Any drop off in demand for the Private Rented Sector (PRS) would likely see a return in social housing, which tends to be counter cyclical as cash-rich housing associations pick up assets seen as too risky by developers.

“There is an increasing trend towards city centre living, facilitated by regeneration, improved place making schemes, improved public transport, agglomeration of skilled labour and the cost of living meaning that many millennials are more than willing to offset space for convenience.”

The high street continues to suffer from the structural shift towards online shopping with 2018 particularly turbulent for many retailers. This distress is likely to see the opportunities for city centre living increase as landlords and local authorities look towards increasing footfall in town centres as well as underpinning decreasing retail values.

However, there is light on the horizon with the creation of the £675 million ‘future high streets fund’ which, alongside making it easier to gain permission for conversion of commercial to residential, will facilitate redevelopment of underused retail units on the high street.

In another market review, Greg Davison, partner in office agency at Cushman & Wakefield, says: “2019 already looks like it could be a busy year. The first speculative office scheme in the region since 2016 will be completed at the Beam in Sunderland, followed by The Lumen at Newcastle Helix in December.

“While there is a now an established pipeline, there are several larger requirements in the market which, if they all move, could absorb the new stock,” says Greg.

He adds: “Regarding rental levels, we have seen a strong period of rental growth in prime city centre rents, driven primarily by lack of supply. We can certainly expect to see £25 per sq ft achieved on the best space during 2019, but I also expect a greater weight of activity in the tier just below that, where I believe we will start to routinely see rental levels reach £22.50 to £23.50 on goodquality refurbished space in locations such as Grey Street.

“This will have a knock-on effect and we expect to see incremental uplifts in rental levels throughout the market.”

The out of town market has been subdued in terms of large transactions; this could change once there is certainly over the UK’s future relationship with Europe, when it is hoped there will be greater opportunity driven by north shoring and re-shoring projects.

Greg continues: “We expect rental levels in this market to hold firm at around £16.50 per sq ft. Savvy landlords will look at being more proactive with their buildings and delivering a more diverse product offer.”

Looking wider afield, the lack of office supply across the region is driving strong rental growth across Europe with rents edging up by an average of 2.5 per cent. Though Newcastle has seen growth of 2.1 per cent, which is lower than some competing UK locations, it has nevertheless outgunned both Berlin and Hamburg.

Peter Atkinson, partner, capital markets at Cushman & Wakefield’s Newcastle office, says: “The North East is proving a key target for both UK and overseas capital. With the region seeing a severe lack of development for almost a decade, supply is highly constrained in both the office and industrial sectors, which is driving both strong rental growth and capital appreciation.

“Despite structural change in the retail sector, Newcastle is reinventing itself with experiencedbased retail and leisure offer and is proving resilient as the region’s capital.”

With several deals ‘in legals’, prime office rents will be established at £24.50 per sq ft before the year is out, which marks 14 per cent growth in the last 24 months alone and this is trending upwards with the only new development committed not to be delivered until Q4 2019. Similarly, Cushman & Wakefield says the industrial sector has an even more constrained supply of modern accommodation and has delivered 20 per cent rental growth in the same period.

These factors combined with modest pricing comparative to other UK and European markets, makes the region very well placed to continue to attract investment capital despite current economic and political uncertainty.

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