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It seems clear that the Northern Ireland property market is on the up. Confidence and transaction volumes have returned in key areas of the market and we are starting to see development plans for new hotels, residential housing and prime offices making headlines.
Both indigenous companies and FDI occupiers are seeking space and that has accelerated the debate on the lack of Grade A office development, with current requirements in Belfast reported to be well in excess of 500,000 sq ft. It is encouraging to see Invest NI has offered to fund up to 40 per cent of costs for suitable projects and as a result, a number of interested parties have been in touch with Danske Bank regarding projects that require senior funding.
Having recently co-sponsored the Insider NI Property Conference at Titanic Quarter it is also clear NI has a more diverse profile of ownership in , with local investors now joined by an increasing number GB-based funds and institutional investors who have been active in the last 12-18 months.
The market saw in the region of £500m of transactional investment volume in 2014 and there has been over £125m so far in 2015, with a strong pipeline of assets due to come to market in the second half of the year.
Notable transactions in 2015 include Erneside Shopping Centre in Enniskillen, Boots (Donegall Place), The Linen Green (Moygashel), Richmond Centre (Derry-Londonderry) and the sale of Windsor House in Belfast. A number of these transactions have been supported with finance from Danske Bank.
The NI investment market continues to offer a yield discount against GB equivalent investments, reflecting the less liquid nature of the market, and whilst this continues to be a core driver of activity levels, our discussions with funds and institutions also indicate their attraction to NI is driven by positive rental growth forecasts and asset management opportunities. In addition, we are also seeing an increased level of appetite and transactional activity from the local investor base, particularly in the sub £10m market. That said, supply of quality product in this space has been, and continues to be, limited.
Danske Bank has been active in the market, with approximately £150m of new facilities committed in the last 18 months. Primarily this interest has been in retail and office assets but we’ve also provided support for industrial, warehousing, hotels and student accommodation assets. We’re prepared to finance both new acquisition funding and refinancing of existing debt from other banks & institutions. Our activity has supported both local investors and UK based investors/ funds.
When assessing a proposal, there a number of core financial risks that we must consider. These include the promoter’s track record and experience, the level of equity contribution they are prepared to make, the certainty of the cash flow – or the strength of the covenant profile – and business risks such as location, diversification of tenants and rental analysis. The traditional assessment of interest & debt service cover can also be artificially higher in the current low interest rate environment, so further focus is applied to sensitivity analysis and debt yield as a means to assessing debt serviceability.
The financing market is becoming more competitive, as not only incumbent NI banks return to the market, but we are also seeing a number of UK banks financing transactions as they follow their clients. Liquidity in the market has also been helped by a number of non-bank funders being active, including insurance company funds & private equity. Our customers tell us that Danske Bank is flexible, has extensive market knowledge and an ability to deliver promptly.
In the coming months, we anticipate seeing an improved supply of stock to the market from a number of loan books, and the opportunity to refinance borrowers. Given the imbalance between demand and supply, we also anticipate seeing investors move further along the risk curve.
That may help address a number of the key challenges still facing the commercial property market.
Office rents at £15 per square foot remain below the level of £18 -£20 per square foot needed for development appraisals to work, particularly given rising construction costs. This is limiting the appetite of developers to progress, particularly on speculative schemes. The market is indicating an increased rental tone during 2015 due to the demand and supply imbalance but our view is we need to see a deal committed to deliver confidence.
The market cycle will also create a challenge. Low interest rates and attractive yields compared to other asset classes such as bonds have resulted in a flow of capital into property. But we know that at some point in the cycle other asset classes will appear more attractive to investors. Danske Bank is therefore focused on longer term investments and projects with sustainable cashflows and debt profiles to withstand the market cycles.
I believe one of the key opportunities the NI economy must now maximize, and which is intrinsically linked to the property market is the successful promotion of NI as a truly international destination. NI offers some of the best opportunities for inward investors and office occupiers, including a leading education system, high quality workforce/ talent pool, good transport links and a low cost base for people intensive operations.
Coupled with the prospect of devolved corporation tax powers, NI has a unique window of opportunity if uncertainties over welfare, the budget and corporation tax powers can be resolved. It will only be with clarity on corporation tax that NI will truly maximise its FDI potential – particularly in the office occupiers market, where rents compare favorably with Dublin.
Belfast has been ranked second only to London for FDI activity in the UK and with a joined up approach and collaboration between public and private sector, there is potential to achieve even more.