Uncertainty faces the property sector

January 2, 2019

Chris Dobson reflects on a recent survey that’s predicting a challenging 2019 for the commercial property sector

The commercial property sector and its anticipated performance in 2019 is facing uncertainty according to a qualitative survey of selected members of Developing Consensus, a group of leading private sector investors, developers, property agents and professionals and public sector authorities and enterprise partnerships in the North East of England.

The survey participants were BNP Paribas Real Estate; Ryder Architecture; Broadoak Asset Management; Newcastle City Council; Invest North East England; Gavin Black & Partners; Kier Developments; iMpeC Developments and South Tyneside Council.

With a confidence score of just 53 per cent, the continuing political environment and Brexit uncertainties are casting long shadows.

Looking at the key findings, Newcastle’s office market is likely to become more attractive as
a clear Grade A development pipeline starts to come to the fore and there will be opportunities for small business and digital clustering in the city’s stock of historic buildings.

But there is market uncertainty and a lack of major private sector investment in the region. The uncertainty can be traced back to the EU referendum and the later general election. As a result, there are increasing levels of delays in decision making, particularly with large scale occupiers, as they decide whether to expand or contract.

There is now a pervading sense of decisions being by committee rather than an individual being accountable, and committing to a new office or manufacturing plant means that hoped- for pre-let deals of new accommodation have not materialised.

With Newcastle’s office market committed to deliver, on historic analysis, five to six years’ supply of new Grade A space to make this commitment work, the city needs “a major boost through a significant inward investor that brings more and better jobs to the heart of the main commercial centre of the North East”.

Industrials

There are encouraging signs in the industrial sector but clarity of trading arrangements after the exit from the EU is desperately needed. The uncertainty clearly impacted on voting for the strongest performing sector in 2019. Industrials narrowly edged ‘Offices’ out of the top spot because ‘the manufacturing sector keeps motoring on, despite the political uncertainty’ and there will be some be some steady deals done in 2019 through advanced manufacturing activity, especially automotive.

There is a caveat, however, with a potential meltdown on no-deal Brexit and the short-term shock to economy as we all know the North East will be the most negatively affected region in the UK due to structure of economy and exposure to EU exports of manufactured product’.

Retail

Retail will be the sector likely to have most difficulties with 100 per cent voting to support this view. The reasons for this are many and familiar – structural changes facing the sector will continue to bite hard, the balance between traditional physical retail space and on-line sales has still
not been found, consolidation into the strongest locations will continue and it is likely there will be further high-profile casualties.

The challenge of repurposing much of our town and city centres is going to get more urgent. Retailers as place-makers and creating experiences are those that will survive in cities. Smaller centres will really struggle.

Another challenging factor across the sector is property values, which have ‘on the whole remained flat for a number of years’ when construction and delivery costs have increased. This puts significant pressure on project viability, making it difficult to demonstrate an appropriate return on investment.

Regional skills shortage

The North East is in ‘an uncertain landscape’, coupled with availability of people – skills development and people retention remain priorities for business and the region. The challenges faced by occupiers are those arising as a result of uncertainty. Until all aspects of Brexit are understood, the level of uncertainty will have a major impact on future intentions.

The lack of availability of talent in the region is a ‘massive limiting factor’ with businesses ‘wanting and needing more people but struggle to find the right quality’.

The challenges faced by occupiers in the region inevitably feed into decision making and the signing of leases with developers.

For completed buildings, this means that void periods extend and profits are eroded by interest burdens. For proposed schemes, developers must assess the exit strategy and think about
the degree of commitment they can expect if they speculatively develop. However, there is an inevitable reduction in activity where occupiers are uncertain.

Looking at the key strengths of the region, the inward investment focus should vary by sector. For instance, the established skills in car manufacturing and battery technology mean the region should appeal to global businesses seeking new production facilities. In healthcare, UK and global businesses should be targeted for the establishment of new facilities in the North East.

Funding will follow the opportunity – the focus should be on enabling the highest value opportunities in each sector, and promoting these in a regionally coordinated way. There is a role for the public sector to come together and create an equity-based investment vehicle, to complement the current grant/loan regime, to stimulate development activity. There is also a case for exploring tax-based investment structures to stimulate investment in key areas.

Returning to Developing Consensus’ regional campaigning, priorities should include infrastructure investment, supporting the North of Tyne devolution and forming closer co-operation with Teesside so that the region as a whole can present a united image.

Commenting on the research, Adam Serfontein, chair, says Developing Consensus is now an active partner in the delivery of the North East Strategic Economic Plan, actively supporting work around the areas of Economic Assets, Infrastructure and Inward Investment.

“We have a number of clear objectives, including to be a voice for the property sector in the region, championing opportunities and issues in the sector, so that there is greater understanding of the industry,” he says.

“We will play a positive role in delivering an active and prosperous property market which will, in turn, support the region in attracting the inward investment from national and international markets necessary for regional development and growth.”

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