Opportunity knocks

June 4, 2019

The early summer Property Outlook: North East report was presented by Cushman & Wakefield to more than 200 attendees keen to hear the detailed insight into the regional market and the national issues affecting the sector, reports Chris Dobson

Richard Turner (pictured), partner and head of investment at Cushman & Wakefield Newcastle office, told the audience at the Property Outlook: North East report launch that the industrial market had less space available “than at any time in living memory”, with no grade A buildings above 50,000 sq ft and Hansteen, UK Land and Northern Trust, which have smaller units, are all at record occupancy levels.

The 1m sq ft Follingby scheme is 98 per cent let and Amazon was a massive story last year taking 1.5m sq ft in Darlington and 2m sq ft in Durham for new fulfilment centres. Richard said that “even stripping these out it was a record year for take- up.”

Looking at the office sector, the market is quiet this year and though Newcastle city centre continues to have a lack of grade A space there is a development pipeline, with Legal & General’s The Lumen at Newcastle Helix the first out of the ground. Cushman & Wakefield is predicting three pre-lets this year.

Elsewhere across the region, Richard said: “We are seeing the first speculative office development in Middlesbrough, Sunderland and Darlington for decades.” This is only possible because councils see development as part of the regeneration of town/city centres and are sponsoring through long term lease wrappers, developing directly or through a joint venture.

Last year’s investment market was flattered by £270 million of Amazon deals when the focus has been on hotels, buy-to-rent properties and student accommodation. Retail is heavily out of favour as values fall in response to the multitude of headwinds against the sector.

The national picture is headlined by Brexit and other sources of uncertainty with the focus getting too short term, even analysing trends on a monthly or quarterly basis, when in fact real estate is a long- term game.

Patrick Scanlon, head of UK offices insight at Cushman & Wakefield, says that over the coming years, “there will be many non-cyclical trends that will create opportunities for investors and occupiers who stay ahead of the curve.”

He adds: “These trends will be in place regardless of global trade volumes, Brexit or any other external force.”

For example, the sector can look forward to the next generation of tenants when high-skilled outsourcing is the main source of job and business growth in the UK regions.

Back office functions will be increasingly outsourced to small specialists in process management. Highly-skilled and increasingly data and tech orientated, this is a far cry from the old-style outsourcing of call centres and admin support.

Consultants are presently enjoying a boom in demand for the same reasons. Established businesses are looking to management and business consultants to help them transform their business in a digital world.

Marketing, advertising and design projects are also increasingly outsourced. These are specialist activities, considering the expertise needed to use social media and good design to get clients’ attention over the noise of online content.

Computer consultants are another area of growth as businesses want advice on how to set up their digital IT infrastructure, from Cloud computing to cybersecurity.

The computer programmers – the coders that design software – are graduating from start-ups and scaling up into the next generation of micro, small and medium-sized enterprises. Software for accountancy, cybersecurity and human resources are leading areas of development.

There is also increasingly co-working hotspots where the growth in new businesses in tech, consultancy and creative industries are often the source of demand. As a result, employees are open to working in shared workplaces. Freelancers are also increasingly likely to rent a desk compared to using a home office.

Businesses are less reliant on physical servers and can securely set up IT on the cloud. Security and bespoke IT requirements are accounted for, for the large corporates, by co-working operators.

The growth of alternative investment in the regions is part of a wider secular trend where investors want income and diversification. These alternatives offer exposure to a diverse range of demand drivers.

Investors also want a stake in the best assets, the strongest covenants and dominant operators and they are considering a wider range of property types to achieve this goal.

As a result, alternative real estate is increasingly liquid and has an international and institutional appeal.

Alternatives were 32 per cent of regional volumes in 2018, which is an all-time high. Some property types – healthcare and student living for example – are heavily biased to the regions, rather than London, and so the regions will always play an important role for investors looking to the UK for investment opportunities.

Overall, these key trends are a reminder that real estate – whether as an investor or an occupier – requires a long-term view. There are long-term drivers at play, which will influence our decisions today.

The Newcastle Outlook event also looked at investment trends and opportunities “in a world of low rates, cash sitting in the bank isn’t going to earn investors anything.” “To get a return” says Patrick, “you need to take risks.”

He continued: “We all work hard to understand those risks to find the best opportunities at the right price. In the short-term, the direction our market takes will be determined by investors’ attitudes to income security and occupiers’ attitudes to the business environment.”

From an investors’ perspective investment that offers defensive income, that is good covenants, long leases and strong occupier fundamentals, will be in high demand. The regional markets have a lot to offer in this respect.

Occupiers, on the other hand, will find new and refurbished space increasingly rare with prime rents rising in the coming years. Competition for space will keep the pre-letting market active.

More opportunistic investors will see strong occupier fundamentals and lower investment volumes as a chance to pick up assets with a refurbishment/redevelopment angle. Challenged assets may see pricing drift until opportunists see value. But there is plenty of capital looking for these opportunities.

The key message – be pro-active and keep the long-term trends in mind. Whether that is the use of flexible office space to reduce your own costs, or an investor looking at a wide range of property types for income.

When there’s uncertainty there is always an opportunity was the theme adopted by Richard Pickering, Cushman & Wakefield’s head of futures strategy. He discussed the impact that digitisation will have on real estate and considered the potential for activities currently carried out using real estate to be substituted by digital alternatives, and posed the question, “Could this mean the end of real estate?”

“In short, no,” said the head of futures strategy, “however, we in the industry need to treat this as a wake-up call. The same trends we see today in retail have the potential to bleed into other sectors. Digital business models tend to have cost and convenience advantages.

“This sets a challenge for real estate investors to reposition their assets and portfolios to focus on real estate’s inherent strengths, such as end-user engagement and experience. For the best innovations in this space, we need to look increasingly outside of our industry, and be willing to challenge long-held paradigms of the role of real estate.”

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Supporting role: Steve Dougan and Aaron Preece