Lynsey Underwood, Investment Surveyor at GVA, Newcastle takes a look at the North East Investment Market
The strong fundamentals of the UK market continue to attract investment activity and the North East commercial market remained buoyant throughout 2017 and Q1 2018.
Noteworthy deals include the off market sale of the St Nicholas Building, in Newcastle City Centre in March 2018. This multi-let refurbished, Grade II listed building sold for £19.3m reflecting a net initial yield of 6.01%. The sale demonstrates continued investor confidence in the Newcastle core office market and strong demand from London-based asset management firms for investments in the regions.
The huge weight of global money has also supported strong investment activity and new entrants to the market have added downward pressure on yields as competition for stock increases. Overseas investors have accounted for circa 50% of UK transactions, with Far Eastern buyers accounting for 41% of overseas purchases. UK real estate will remain a ‘safe haven’ asset and the recent Budget announcement to charge Capital Gains Tax (CGT) on UK commercial property owned by overseas vehicles from April 2019 is unlikely to reduce its attractiveness. Indeed the increase in CGT will merely align the UK with the rest of the world.
The average all-property equivalent yield moved downwards throughout 2017 and has fully reversed the upwards jump following the EU referendum. It now stands at 5.9%, the lowest level since November 2007 (IPD Monthly Index). Investor appetite remains particular strong for secure long income investments with indexed reviews, as demonstrated by the sale of the Maldron Hotel on Newgate Street, Newcastle. This 265-bed hotel, which is currently under construction, has a prelet in place based on a 35 year unbroken lease with 5 yearly RPI linked reviews. The investment sold in November 2017 for £35.31m reflecting 5.21%.
Prime industrial stock has also been a success story of 2017 owing to the strong occupational performance as well as its secure long dated income characteristics. The shortage of stock has led to premium prices as investors seek to acquire relatively defensive assets with reasonable income returns. Average industrial capital values increased by 15% in 2017 and yields continued to move downwards to 5.8% in January (below the all-property average), compared to 6.4% at the end of last year. As a result average industrial total returns were an impressive 20.1% (IPD Monthly Index).
The most notable industrial transaction in the North Easts in 2017 was the sale of the Royal Mail distribution unit in Team Valley, Gateshead. The property had an unexpired term of over 13 years at time of sale and is located in the premier industrial estate in the North East. It sold for £16.15m reflecting a net initial yield of 5.22% in July 2017. The property attracted a number of investors due to the strong occupational market on Team Valley and the secure long dated income of the investment.
Investor demand for high quality real estate will remain strong, although limited available opportunities could curb the level of investment activity. As yield compression continues throughout the prime markets, more investors will seek out value-add opportunities through development and asset management initiatives. Capital values in London and the South East remain particular high and we expect investors to continue to be attracted to the better returns on offer in the North East.
The continued shortage of industrial stock throughout the region will add pressure to rental growth and we therefore expect this sector to outperform others in the North East. We expect particularly strong investor interest in the last mile delivery sector, which should achieve close to a double-digit return. Although rising interest rates will reduce the gap between gilt yields and all-property equivalent yields a little, the gap will remain historically wide and so commercial property will continue to look attractive.