by Gerard Small, Commercial Property Partner, John McKee Solicitors
There has been much optimism in the commercial real estate market in Northern Ireland over the last 12/18 months. Deleveraging, following the purchase of local bank loan books by US investment funds, has stimulated a resurgence of activity, with local agents reporting record post-recession transactional levels in 2015. Many development sites and investment properties (particularly shopping centres) are now in the hands of new solvent and well-financed owners, all wanting to ‘squeeze the asset’ for maximum return and benefit from the relatively high yields available based on the lower acquisition values paid in distressed sales.
We have also seen a wave of planning applications for new hotels, student accommodation and apartments in Belfast City Centre, many of which have received approval and some already under development.
A successful commercial property market, though, is not simply an end in itself. It is widely recognised that sustainable economic development and growth depend upon the availability of sufficient supplies of good quality, modern commercial real estate.
In Northern Ireland, there has been a real drive for economic growth in recent years, with efforts to promote the City of Belfast, and Northern Ireland as a whole, internationally.
The thrust being that Northern Ireland is a good place to do business, with a relatively low cost of living, a skilled and educated workforce and, now from 2018, a reduced rate of corporation tax compared to the rest of the UK and equivalent to that in the Republic of Ireland.
If ever there was an opportunity for foreign direct investment (or indeed investment from elsewhere in the UK and Ireland), now is the time.
So where are the cranes overhead in Belfast and elsewhere in Northern Ireland evidencing a start to the much needed new office developments required to facilitate such inward investment?
A scan of the Belfast skyline in particular reveals a small number of cranes, but on closer examination these appear mostly to be new hotel or student accommodation schemes. What we need is Grade A office stock built on large floorplates. There are significant office schemes already completed and under way at City Quays, but in Belfast’s Central Business District there appear to be a real dearth of these (the Ireland Brothers building in Adelaide Street is one exception).
New office schemes can take 2, 3 or 4 years to bring from the planning application stage to completion. So new development needs to be started now if we are to be in a position in 2018 to accommodate fresh inward investment from businesses outside of Northern Ireland, attracted by its low rate of corporation tax and other benefits.
So why is this not happening more extensively already?
The principal reason given is the lack of developer appetite, and the absence of bank or mezzanine finance, for speculative development. Unless proposed schemes can be pre-let, it seems that ground will not be broken on new development whilst rents remain below the magic £20.00 per square foot level. Rents are reported to be rising and reaching these levels now, but surely time is running out if we are to be ready for the brave new world in 2018?
The question then is what incentives can be created by government and/or funders to stimulate new build office development in central Belfast and elsewhere in Northern Ireland?
Belfast City Council has developed a City Centre Regeneration and Investment Strategy with designation of 5 Special Action Areas. The Council has also established an £18.77 million City Centre Development Fund which will be used to kick start some projects in partnership with the private sector. These are welcome steps but more immediate, direct action is likely to be required.
RSM McClure Watters reported to Invest NI in 2014 on the need for the introduction of new, or the revival of previous, property initiatives to stimulate economic development. The potential interventions considered included:-
speculative public sector-funded office development;
public sector acquisition of new office buildings;
provision of development funding;
provision of capital grants to developers;
provision of mezzanine finance to developers;
a public sector body taking equity stakes in development;
a public sector body taking underlying leases and subletting the accommodation; and
a public sector body acting as lease guarantor for qualifying businesses.
Subsequently Invest NI announced that it was proposing to offer private sector developers mezzanine/equity funding on commercial terms towards the development costs of new Grade A office accommodation in excess of 50,000 square feet. Expressions of interest were invited between 1 May and 31 August 2015 and it is understood that some applications are currently being processed. However, the scheme is now closed to new applicants and it may be that a longer term initiative is required to give a significant boost to the construction of large-scale new build office stock.
There may be opportunities for local banks also to provide funding on special terms which is more attractive to developers. The banks themselves may need to be incentivised by government support or concessions.
The political mood music appears to have improved in the short term, with long standing disputes on budgets, and welfare reform apparently settled, for now. The question is whether this will continue post-election and, in particular, whether any newly-formed Executive will bring its collective mind to bear swiftly on finding answers to the problem of new office development.
It is a cliché, but the reality is that ‘joined up’ thinking on the part of government, financiers and developers is now needed urgently. Innovative solutions must be devised quickly to encourage the early commencement of new office development that will meet the requirements of businesses investing in Northern Ireland for the first time in the coming years. Without such solutions, we are in danger of missing the office window. Let’s see those cranes multiply across the skyline of Northern Ireland.