Knight Frank’s UK Regional Cities Office Market Review 2018 reveals although office take-up in Newcastle city centre saw a 19% decrease in 2017, a more positive market tone was evident as the year ended – demonstrated by an increase in the level of enquiries and viewings.
Head of Knight Frank Newcastle, Peter Bowden, comments: “Occupational demand steadily increased towards the end of 2017, which bodes well for the prospect of rental growth and balances against increasingly low investment yields.
“In particular, the technology industry grows in presence and we anticipate that this sector will become even more important to the Newcastle office market in 2018.
“The challenge to growth however, will be the availability of ‘Tech firm friendly’ space. For capital markets, the outlook is also cautiously optimistic. We expect prime yields to contract, as the weight of money chasing prime stock increases.”
A total of 177,900 sq ft was transacted during 2017, with the number of deals broadly similar to 2016.
The prime headline rent for the region increased by 2% in 2017 to £23.50 per sq ft and Knight Frank is predicting a further 2% growth in 2018 to £24 psf.
Whilst fluctuating during the year, Grade A availability finished 2017 at 175,000 sq ft. This total is 15% below the 10-year average, but more notably none of this is made up by new buildings. Supply will therefore come under increased pressure in the coming 12 months, with the development of 107,000 sq ft at Science Central not due until H2 2019.
The Professional Services accounted for the largest percentage of let space in 2017, 30%. However, representation from Technology Media or Telecoms occupiers continues to grow. The sector accounted for 28% of take-up – with Trinity Mirror North East (12,500 sq ft) and The Communicator Corporation Ltd (5,700 sq ft) notable firms to take new space in 2017.
As well as a summary of the commercial property market performance of 10 of the UK’s regional cities in 2017, the report also discloses Knight Frank’s chief economist, James Robert’s UK economic outlook. Roberts shares his predictions that four sectors of the economy may deliver strong growth in 2018, with potential opportunities for the regions:
ROBOTICS AND ARTIFICIAL INTELLIGENCE (AI) This part of the digital revolution has been a rising tide for some time, but it is about to accelerate in the UK in particular as the result of the move towards Brexit.
Firms will no longer be able to rely on labour from the EU, but the tap is being switched off at a time when unemployment is at its lowest level in 42 years. As a result, firms will invest more in automation and AI to fill the gap, creating demand for office space from the technology firms. We see activity weighted towards cities with universities that have strong IT departments.
NEW WAVE FINANCE In China, some cities are rapidly turning cashless, as more people pay for goods with their mobile phones. Even the buskers accept electronic payments now. A combination of ubiquitous smart phones, and pressure on regulators to open up the market, means banking in the UK is set for huge disruption. We believe the new wave of fin-tech firms, lacking the historic ties to London, will be more open-minded on where they locate. This could open up a new source of office demand for the regional cities
SHRINKING SUPPLY CHAINS Even prior to the vote for Brexit, there had been a movement towards shorter supply chains, reflecting more customisation in manufacturing and a desire to speed goods to market. With the UK leaving the EU, more firms are looking to buy supplies locally, which could result in new manufacturing firms being established. These will need office space for their HQ and design functions. Also, we see the move towards customisation creating demand for city centre design offices, as manufacturing firms employ more creative workers.
GREEN INDUSTRIES In 2017, the UK had its first ever day operating the electricity network without coal, drew 52% of its power from low carbon sources during the summer months, and broke records for wind power production, according to National Grid. A recent report from the International Renewable Energy Agency suggested green energy could be cheaper than fossil fuels by 2020. We see green energy firms becoming more important in the economy and office market going forwards.
Other headline Information in the report includes:
NEWCASTLE OCCUPIER MARKET
Demand for flexible office solutions continues to be a feature of the market and has meant that Citibase took further space, acquiring 13,100 sq ft at the Broadacre House.
Newcastle city centre is rapidly becoming a target city for co-working operators looking to benefit from the burgeoning digital and tech sector.
The 21,300 sq ft lease at 2 St James Gate taken by Eldon Insurance was the largest city centre transaction to complete in 2017. Eldon Insurance relocated from Cale Cross House, which was home for the company for 10 years. Other tenants at St James Gate include, the Big Lottery Fund, WYG Group Ltd, UBS and Listening Company Ltd. Subsequent to the letting, the property has been acquired by Palace Capital.
NEWCASTLE INVESTMENT MARKET
Following a relatively strong 2016 in terms of trading activity, the reluctance of landlords to bring assets to market in the absence of suitable alternative opportunities meant overall volumes suffered. Investment turnover for the year reached £50m, 49% below the 10-year average for the city. Interestingly, actual deal number was up when compared to 2016, but it was the absence of higher value sales that meant investment volumes remained below the long-term trend.
Arising from the all issued share purchase of SM Newcastle, the acquisition of 1-3 St James Gate by Palace Capital PLC for £20m was the only sale to complete over £10m in 2017. The mixed-use development comprises of a 61,000 sq ft office and two retail units. The purchase price reflected a net initial yield of 8.6%.
In August, Watkin Jones Group, via their SPV Planehouse Ltd purchased Keel Row House from Aviva Investors for £8.85m. The 23,794 sq ft property is fully let to Ward Hadaway until 2030.
The second biggest office letting of the year however, was the 19,000 sq ft lease taken by Frank Recruitment Group at the St Nicholas Building. The firm agreed terms on an 11-year lease with the space split over two floors. Sir Robert McAlpine Ltd and the National Audit Office are also tenants in the buildings.
