‘Confidence in the occupational markets is improving’ – Tony Hordon, Senior Director and Head of DTZ’s Newcastle office comments:
“We left 2013 with very good foundations and a healthy level of take-up both within the city centre and out of town markets. At over 1m sq ft in 2013 for the North East of England, this represented one of the highest levels of take-up the region has seen for more than a decade. Whilst we may not reach these levels at the end of 2014, nevertheless it still will represent a very healthy year, perhaps more importantly, maintained confidence in the occupational markets and continued improved confidence in business sentiment.
Take up in the city centre is likely to exceed 200,000 sq ft with key transactions including the sale of 89 Sandyford Road to Newcastle University representing 35,000 sq ft and Teleperformance acquiring 28,000 sq ft at Baltic Place. In the out of town market there has been the healthy activity at Cobalt Business Park and Quorum Business Park with transactions including Utilitywise Plc acquiring 77,000 sq ft and Cofely Workplace acquiring 30,000 sq ft at Quorum Business Park. The average size of transactions has increased from the previous year from 4,400 sq ft to over 5,000 sq ft, providing another barometer of the continued confidence in the occupier markets.
Given Newcastle city centre has a large concentration of Grade I and Grade II listed buildings, the delivery of Grade A office space has always been frustrating and therefore the city have never had an abundance or indeed over supply of grade A space. This has therefore ensured we have maintained a reasonably healthy headline rent despite recession and therefore the perfect foundations for strong rental growth as we continue to climb out of recession and as we continue to see the occupational markets maintaining momentum. The anticipation is that Newcastle city centre should have strong sustained period of rental growth, given the dearth of Grade A accommodation with currently less than 12 months supply. We will enter a window of perhaps 2 or 3 years with no Grade A accommodation and therefore it will be interesting to see which developers are first out of the blocks in order to fulfil occupier demand. The only scheme which is currently under construction is The Rocket at Stephenson Quarter, a development on behalf of the Clouston Group with Newcastle City Council, which will complete in July 2015 and amount to 35,000 sq ft. Given these dynamics, not only will we see rental growth, but a hardening of incentives.
In the out of town market there is of course very different dynamics with the continued large amount of supply, namely in the principal Enterprise Zone business parks of Quorum Business Park and Cobalt Business Park. Both business parks have an excellent quality of stock with outstanding demographics and a very compelling financial solution for an occupier considering their new occupational needs.
When reflecting on 2014, it has been a year of continued stability and improvement, building on the foundations set in 2013. Hopefully this will continue, although we will continue to be faced with challenges, but different challenges. The city centre will be the greatest challenge with a lack of stock, with perhaps refurbishments and redevelopment providing another vehicle to meet the continued demands.”
‘2014 has seen strong investor demand for assets in the North East’ – Peter Atkinson, Associate Director in DTZ’s Newcastle Investment agency team reviews the region’s investment market in 2014 and looks ahead to what’s in store for 2015:
“Over £20 billion of deals transacted in the first half of the 2014 alone with UK institutions leading the drive to invest. As the economy has strengthened and yields hardened in London and the south east more and more investors have looked to the regional markets. As such the North East has seen a strong turnaround over the last 12-18 months.
With the recovery cascading through the hierarchy of regional cities at a rapid pace the North East is in demand offering comparatively attractive yields underpinned by strong occupational markets and a starved development pipeline.
These fundamentals combined with planning reform driving alternative use development potential continue to offer opportunities across the full spectrum of the market suited to both value add investors and mainstream institutional funds.
Examples of recent major institutional investment in the city include Standard Life’s £22m purchase of Central Square South, Orchard Street Investment Management’s purchase on behalf of the BBC Pension Trust of Time Central at £24.64m, Aviva’s purchase of 1 St James’ Gate at £18m and Cornerstone Investment Management’s purchase of a mixed office and industrial scheme at Gateway West for £12m.
Looking forward, with a backdrop of the improving economy, the starved development pipeline and improving occupier markets forecast rental growth is expected to maintain a positive trend with further yield compression (falling yields, rising capital values) also expected in 2015. Consequently, in most markets the highest total returns for the near future are expected in regional markets with the North East participating strongly in this. For example, prime regional markets are expected to return 7.1% per annum going forward against central London at 6.7% and hence there is a clear rationale for investment in the region.
The exception to this is high street retail where the fundamental shift in the dynamics of the retail economy, together with an oversupply of space and over renting of many properties means that this market still remains very difficult with, in some case, prices continuing to fall.
As highlighted above, one particularly heartening trend in the North East has been the region’s continued evolution as a genuine destination for institutional capital. Previously the North East and Newcastle has played second fiddle to the ‘Big 6’ regional cities, but it is now, whilst not considered on a par, certainly not discriminated against as it would have been previously.
‘Increasing appetite for design and build opportunities which should continue next year’ – Chris Donabie, Associate Director in DTZ’s Industrial agency team in Newcastle, reviews the North East industrial market in 2014 and looks ahead to what’s in store for 2015:
“2014, very much like the previous 12 months witnessed continued buoyancy in the industrial market with positive occupier sentiment translating into healthy take up. Current market positivity is tainted somewhat by the uncertainty as to how demand will be met in the coming year as the supply of existing better quality stock has eroded to critical levels in some locations. One worrying statistic is that by the end of Q1 2015 we expect there to be no availability of large modern Grade A space (buildings in excess of 50,000 sq ft) in the whole region.
Manufacturing and offshore engineering have continued to perform well, with warehouse and distribution also bolstering take-up this year. Demand, as expected, has been at its strongest in the region’s hot spots including Cramlington and the A1(M), A19, A194 and A1231 corridors in Tyne and Wear. Washington in particular has seen heightened demand. Commencement of development of the new Hitachi Rail facility on Merchant Park in Newton Aycliffe was also welcome news with spin off demand from their supply chain expected but not apparent as yet.
The lack of supply has be eased slightly by development of three speculative schemes this year – all well located and close to either the A1(M) or A19 in Tyne and Wear – but units are all at the small end of the scale with the largest single unit being around 25,000 sq ft. 2015 should further speculative development of smaller units on estates such as Team Valley and Tyne Tunnel. These smaller-scale developments may be considered less risky than larger speculative development but the current supply and demand imbalance is providing an increasingly compelling case for larger development in some of the region’s hotspots.
For the time being there appears to be an increasing appetite from occupiers for design and build opportunities and we should see an increase in this activity next year.
The current supply and demand dynamics have acted to underpin rental levels and we are now seeing rental growth allied with a hardening of incentives in key locations. This trend should continue through 2015 as the supply squeeze runs on. This is a welcome boost for landlords and one of the reasons why industrial property in the North East has been so popular with investors this year seeking strong returns based on solid fundamentals.”
