By David McNellis, Director, Lisney
Worldwide demand for distressed property increased dramatically in the second quarter of this year, a survey published recently by the RICS (Royal Institution of Chartered Surveyors) found out.
Over 80 percent of the countries surveyed by RICS reported heightened levels of interest from specialist funds, with three-quarters of those surveyed reporting greater levels of demand than the quarter before.
Investor demand rose most dramatically in Japan and Hungary, with Italy, Poland and Russia seeing noticeable shifts in sentiment, with demand swinging from negative into positive territory.
The survey does, however, suggest that the supply of distressed property continues to outstrip demand in some countries, most noticeably in the Republic of Ireland and the UK. Northern Ireland, no doubt, is in a similar place.
But the survey raises an important point from a Northern Ireland perspective – that specialist funds and institutional investors are extremely important in an era of limited bank funding available to support private activity.
Last year, there was a flurry of activity from funds and institutional investors for prime, well-let retail investments in Northern Ireland. This included the purchase by Metric Property Investments of Newry’s Damolly retail park for £28 million and Scottish Widows Investment Partnership bought Longwood Retail Park in Newtownabbey for £48 million. Laharna Retail Park in Larne and Strabane Retail Parks were also purchased by institutional investors.
Expert property agencies like ourselves are asset managing distressed assets on behalf of clients to make them into products that will be attractive to institutional investors.
A notable fact in the Northern Ireland office investment market however is the lease structure imposed by the public sector which makes investment in the local product less attractive for institutional investors than elsewhere in the UK. In simple terms, this structure is created by the public sector imposing its dominant position in the market place, enabling it to dilute its liabilities because the leases place an imbalance of liability on the landlord which would not be seen in England, Scotland or Wales.
Government is a major occupier of office space in Belfast, accounting for something like 50% of all leasehold occupancy. This puts it in a very strong position in the marketplace to negotiate terms. These terms, government would argue, enable it to achieve value for public money. However, it is worth looking at the wider implications of this situation, as it is damaging for the investment market, and I would argue for Northern Ireland as a whole.
The lease structure that many office landlords in Northern Ireland have had to accept from public sector occupiers is different to any other sector in Northern Ireland. It puts an undue liability on the landlord, which wouldn’t be possible if the government didn’t have such a large say in the market. During the last development cycle, when local developers backed by bank funding were purchasing office development opportunities, these peculiar circumstances were able to continue.
Today, this scenario, which is peculiar to Northern Ireland, should not be able to persist. If it does, it will restrict Northern Ireland’s ability to attract institutional investment, which is more important than ever before.
In addition, increasingly, given the current pressures on them, in the absence of bank development finance, many developers may be discouraged from creating the required stock to accommodate Foreign Direct Investment, crucial to re balancing our economy, knowing that if there are any institutional office investors they will only pay a price reflecting a heavy discount.
If the investment product is not sufficiently attractive in its lease structure, then this will leave local developers to shoulder the burden to meet the various obligations that these leases place on them at a time when many are already under severe pressure. In effect, our development pipeline will not be able to deal with the ‘footloose’ occupiers that we need to attract.
These leases may, on the face of it, appear to be good value for public money, but a closer look suggests that they aren’t in the wider interests of Northern Ireland at a time when inward investment is essential.