Reasons to be cheerful

January 9, 2018

Property writer, Chris Dobson reports on a round table discussion organised by the Bank of England’s North East Agency as part of its regular dialogue with the region’s business community. Held at Knight Frank’s regional head office last month, the event was attended by senior representatives of Metnor Group, Cushman & Wakefield, Knight Frank, Turner & Townsend, Union Property Services, the Civil Engineering Contractors Association, UK Land Estates and Broadoak Asset Management, who discussed the current state of the regional property market

The North East regional commercial property and construction sectors are both in good heart despite underlying Brexit concerns.

On one hand, there is an active offices sub-sector with a new rental tone being established in the historic Grainger Town’s Grey Street, Newcastle, and significant refurbishment and upgrading taking place elsewhere in the city with a new high of £25 per sq ft being sought.

Furthermore, Legal & General is about to go on-site with its first phase of office space in Science Central, which adjoins the Gallowgate/St James’ Boulevard Quarters.

This is supported by Newcastle City Council which has already had successful involvement in city centre development in the Stephenson Quarter which was instrumental in attracting Convergys’ call centre with 600 jobs.

However, compared with the two major Scottish cities, the key locations within Northern Powerhouse and principal cities elsewhere in the UK, Newcastle city centre has no supply of new Grade A office space and presently nothing under construction.

The city’s prime rent is £23 per sq ft and the lowest compared with ten UK locations, including London’s City and West End markets.

However, Knight Frank says rents are expected to go above £23 per sq ft in 2018 – an accurate forecast as this level has now been exceeded.

This is making Newcastle’s city centre an attractive location with an £38 per sq ft occupational cost as well as an available quality workforce stemming from its excellent senior, independent, schools and its two universities.

But without available office space, it is felt Newcastle is at a disadvantage when it comes to attracting inward investment, an ‘Achilles heel’ with rents hardly changing, making development of new build, Grade A space marginal if not unfeasible.

Such a conundrum has created an opportunity for the imaginative refurbishment of office space in the city’s Grainger Town. Stylish space behind spectacular frontages with relatively small floor plates is attracting growing tech companies, as well as the professional sector. The success is forcing rents upwards.

Newcastle, with its city culture, attractive hinterland and excellent communications, is a regional capital. It needs to reinforce its attractions as a place to live and work and widen its boundaries; not be restricted by Local Authority boundaries but widen the scope to show what an outstanding part of the world the North East is. Industrials have had a strong year with competition at times for stock. Two regional sites have been short-listed for the Heathrow logistics project. The price-sensitive hotel product is very much in demand with hotels reporting full to capacity on a regular basis.

Meanwhile, GVA’s latest Economic Property Market Review confirms that investment activity in the UK commercial market has been resilient and investors remain pragmatic as the UK continues to be viewed as a stable “safe haven” global property market.

Simon Beanland, senior director, GVA Newcastle, says rising interest rates combined with slowing consumption and lacklustre GDP growth would normally suggest an upward movement in property yields.

“But the continued high level of global demand for quality UK commercial property, combined with a very limited supply of available assets, means a significant upward shift in property yields is unlikely. Indeed, for quality property in selected high-demand sectors, such as distribution and multi-let industrial, yields could well fall further,” he says.

Lambert Smith Hampton, too, has been active with a research report covering Northern Powerhouse. This showed take-up of office space in Newcastle city centre towards the end of 2017 was up 16 per cent on the equivalent period in 2016.

The out-of-town market has led the way in terms of take-up, with activity over the first three quarters of 2017 reaching 367,188 sq ft, 11 per cent up on the ten-year average.

Activity among smaller TMT occupiers has been notable, with numerous transactions driven by expansion. Generator Studios has successfully attracted this sort of demand and is now fully let. The success of the scheme is testament to strong demand for contemporary-style office accommodation with exposed services.

In terms of active demand, there are two major requirements in the city centre and out-of-town, of 20,000 sq ft and 90,000 sq ft respectively. Other requirements are limited to smaller sizes of below 5,000 sq ft. Grade A supply has reduced by 21 per cent from the beginning of the year to 134,601 sq ft. Central Square South accounts for a third of this and offers the largest floor plates in the city centre.

While there are no developments currently underway, there are a number of exciting schemes in the pipeline, including the aforementioned Science Central venture between L&G, Newcastle University and Newcastle City Council, which will ultimately deliver up to 500,000 sq ft of office and lab space.

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Supporting role: Andrew Gilmore and Paul Gibson