Posted on Thursday 13 October 2016 by Ulster Business

Rebuilding confidence in commercial property

By John Simpson

Commercial property values and market behaviour are still in uncharted waters.  Just over six years ago the bubble that signalled an end to rising property values burst.

None of the property investors, developers or venture specialists had, prior to 2009, seen anything comparable to what happened after 2009.  Negative equity was not unknown, in rather modest degrees and for rather limited periods.  

The scale and duration of the events which unfolded were neither predicted nor previously experienced by anyone under the age of 80!  In addition, such was the state of expectations that no credible institution stood ready to anticipate a crash, crisis, or meltdown.

The crash in commercial property values was serious in Ireland, north and south.  The perception is that the property crisis in Ireland was more dramatic than in England.  Initially, the impact of the loss of confidence in property values sharply hit the finances of developers and investors.  The ripple outwards soon reached many construction businesses and, even more dramatically, eroded the viability and security of the banking sector.

Now, six years after the crisis hit, the essential question at least in Northern Ireland is whether normality has been restored or to what degree the new normality is able to accommodate a revival of property market development.

The new normality might reasonably still be described as still abnormal.  The inherited environment includes:

  • a housing market constrained by serious and widely spread negative equity
  • a less enthusiastic smaller group of large scale local developers
  • a financial sector relearning how to assess and respond to financial support for development proposals
  • a post-Brexit caution on the prospects for the local economy.
  • a market place still potentially destabilised whilst NAMA type properties find new (or restore former) owners.
  • a public sector motivated to reduce the size of office space held by public sector departments and agencies

The emerging commercial property market is enjoying at least one sustaining feature.  The scale of empty commercial property has diminished.  The market where prospective tenants were able to negotiate very favourable leases is now less a one-sided relationship.

Into this property marketplace, account must now be taken of the emerging features of the changing economic strategy to be set by the Executive as a new Programme for Government is drafted and of the spatial dimensions of market demand in each of the 11 new local authorities as they prepare local development plans which are under review.

Northern Ireland, with particular emphasis on trends in the more central parts of Belfast, has attracted a number of ‘back office’ functions for national businesses.  If there is a common strand to these developments it is that modest middle range communications and IT activities can be staffed and organised here on a competitive cost basis, relying particularly on competitive rents and competitive labour costs for employees with primary degree level capabilities, usually seeking reasonable literacy and numerical dexterity.  There are also some examples of more mid-range occupations with scientific underpinning as well as developments in the creative industries linked to film, TV and IT games origination.

The ambitions of the Programme for Government convert into an aspiration for an increase of 50,000 in regional employment over the next five years.  If that is to come near to fulfilment, perhaps about half of the increase could be in mid-range communications, IT and scientific skills linked to new employers.

For the property market, this forecast translates into enquiries about the availability of more office accommodation of good quality, located conveniently for travel to work, and available at competitive rental or leasing costs.  This seems to point to a market for larger commercial buildings designed for the application of digital technologies.  Places like Titanic Quarter, Belfast Harbour estate, and more modern commercial estates peripheral to Belfast and Derry may be high on the agenda.

Is this prospective property market strong enough to attract viable projects? 

For highly-leveraged projects, lenders will need to be reassured if borrowing is significant (and what is meant by ‘significant’ lies in the cautious awareness of the lender). There are undoubted opportunities for major investors who make a careful choice of location, type of building (and its environment), and style of presentation.  With hindsight, now, the recent investments in Laganside, Titanic Quarter and Belfast Harbour offer good long-term prospects.

Just as important as the prospective demand for an increased supply of commercial building investment, usually for offices or warehousing, there is the inter-related question of whether there is the potential supply of funds from developers and investors.

The appetite for commercial development has been affected in contradictory ways.  First, some developers have been singed.  Their capital base and borrower credentials were depleted by the crash in property prices and the arrival of administration, liquidation or worse. In contrast, for some developers (and potential new developers) the property crash, the arrival of NAMA and then the sequential sale and repurchase of former assets, has indirectly rebased some businesses after debts have been written down, assets re-valued, and emerging goodwill re-entered into the accounts to create viable returns.

This fundamental reorganisation of the business of developers comes at the same time as the banks, serving as major sources of finance, reassess their scope and terms for lending.  In the two years, from late 2013 to late 2015, the banks in Northern Ireland have reduced their total lending on real estate etc from £8.5bn to £5.2bn: a drop of over £3.3bn, or 40%.  Figures for the longer period from 2009 are not available but would obviously be larger.

Lending to construction businesses fell from £3.5bn to £0.9bn over the same period. That fall of 74% confirms that the activity and financing of building has changed more than dramatically.

Into that situation, the challenge for the commercial property market in 2016 and onwards is of a fundamental re-orientation and a need for restoration of confidence.  If 2015 was the low point in the recent crash, then the realistic comment must be that now is the moment that things begin to get better.  It probably is!

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