Partner Article

Grade A supply ‘this year’s key issue’

The lack of Grade A office availability will continue to be the dominant theme in 2017 with only refurbishment schemes set to complete guests heard at Knight Frank’s first North East Property Market Briefing held at the Crowne Plaza Hotel, Newcastle.

Dickon Wood, partner, Capital Markets, told the audience that “notwithstanding the slow start to the year, the North East Investment market is in a robust state with good prospects for rental growth across the sectors. With this in mind, and the discount on yield from the top six regional centres, we anticipate a strong year in 2017. After two years of profit taking, investment volumes are likely to fall although a common theme will be the hardening in prime yields as investors continue the flight to prime”.

Mr Wood added: “Legal & General’s initial investment of £65m in Science Central will bring forward the first 200,000 sq ft phase, but construction will start late 2017. Low supply coupled with an increase in occupier demand is likely to add upward pressure on rents, with a rise expected by year-end.”

With regard to the industrial sector investment yields on single let units “contracted heavily throughout the year with prime yields reducing to 6% for a 10 year term. This is best evidenced by the Knight Frank sale on behalf of Warburg Invest of the Co-op Distribution Centre at Birtley, let to Co-op Group for an unexpired term of eight years. The purchase price of £17,300,000 reflected an initial yield of 6.20%”.

The industrial sector has replaced the high street as the sector of choice for private investors who are particularly attracted to secure covenants, reduced dilapidation risk and strong prospects for rental growth. With the increased costs of construction inhibiting any speculative development, the reduced supply of stock is increasing the pressure on rents.

Mr Wood continued: “The multi-let industrial estate sector was once again the best performing sector on a national basis although given the large single ownerships in the North East, very few estates are traded throughout the year. Notwithstanding this, this sector of the market remains the most attractive to institutional investors.”

This theme was echoed by Simon Haggie, partner, industrial agency, who said “lack of availability of modern stock will continue to limit take up and create upward pressure on rents. In spite of pressure on margins positive sentiment amongst the regions manufacturers, an increasing number of which are reporting strong forecasts for new orders, offers optimism for 2017.

“Combined with evidence of higher rents being achieved this should offer hope to developers that speculative development will become more viable and attract interest. Brexit continues to loom large on the horizon and twists and turns in sentiment are expected as the Government navigates its way towards trade deals which will impact on the region’s future.”

Returning to office supply, Patrick Matheson, partner, office agency said Grade A availability in Newcastle City Centre “fell by 26% during 2016 to reach 173,300 at year-end, almost all of which is previously occupied space. This total is 23% below the long-term average for the city”.

The development pipeline over the next two years consists of just 72,000 sq ft split across two comprehensive refurbishment schemes. With the first completion date not until the last quarter of 2017, “this means low Grade A availability will again be a feature of the market in 2017”.

“The next new build space is not due to complete until early 2019, with the planned delivery of 100,000 sq ft at Science Central. Out of town availability is greater with Quorum and Cobalt providing 300,000 sq ft and 260,000 sq ft respectively,” said Mr. Matheson.

ENDS

This was posted in Bdaily's Members' News section by Knight Frank .