September 7, 2016
The property market has been challenging, to say the least, over recent years. And just as we were seeing some improvement, Brexit has happened, which has created more confusion.
Immediately, doom was forecasted over the property sector, and just like a self-prophecy, the share value of property companies and house builders ‘fell off a cliff’. Yet the market did not respond in that way.
Two auctions in the week following the result of the referendum reportedly saw about 90 per cent of the lots sold at prices some ten to 20 per cent higher than the reserve prices.
Investment funds are actively seeking opportunities within northern regions, such as in the North East, rather than in London, which is becoming overcrowded, highly competitive and proving a challenge in regards to creating the necessary yield for foreign markets.
The North East offers a good level of demand for city centre grade A (top quality) offices and modern industrial units, but a shortage of supply – a good position for investors with potential growth in rent and returns.
The position is not so good for out-of-town offices with a supply of space that is being taken up over time but not yet in a position of shortage; thus rents are not seeing much growth.
The values of city centre offices and industrial units, because of improving yields and rental growth, make development viable. Gaining finance from the usual sources of banks and short-term lenders is still problematic with a reluctance to step up on a speculative basis.
The funding of student accommodation in Newcastle is fading except for those locations that are prime. Those developments on the periphery will struggle as supply begins to match demand.
Leisure development is still progressing with restaurants and bars going well as locations churn and change in the city centres and in stronger towns in the region. But hotels in Newcastle are beginning to struggle with the weekend demand reducing to one-night visits. We need a stronger corporate demand to build the market but this is not surprising with about 1000 hotel bedrooms being added to the city centre over the last two years or so. I expect to see quality service becoming critical.
We have a crisis in the supply of new homes across the board, from executive-style housing and family homes, to affordable homes. Much of the new development is focused on greenfield sites that are less risky, quicker and more profitable to build. We need to see smaller builders enter the market, more use of brownfield sites to be made shovel-ready for development and the skill shortage met with new apprentices coming through training.
We need to grow demand in the market. Property will not lead the region out of recession but if there is not an adequate supply of space, it will retard or delay that much-needed growth.