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RESEARCHNEWCASTLENORTH EAST PROPERTY MARKET REPORT2018
CONTENTS203FOREWORD04OCCUPIER MARKET – OFFICES05OCCUPIER MARKET – INDUSTRIAL06INVESTMENT MARKET07KNIGHT FRANK VIEWPlease refer to the important notice at the end of this report
NORTH EAST PROPERTY MARKET 2018RESEARCHFOREWORDOpportunities still shine through the Brexit fog.How is the North East market going toreact and adapt to the challenges ofa slow economy, Brexit and the lackof prime space in the region? Well ifIan Dury was writing his lyrics now to“Reasons to be Cheerful, Part 3” hewould probably include, economicgrowth is still positive, and there areopportunities to be had.“ Well if Ian Dury waswriting his lyrics now to“Reasons to be Cheerful,Part 3” he would probablyinclude – Economicgrowth is still positive –and there are stillopportunities to be had.”PETER BOWDEN artner, Office HeadPKnight Frank NewcastleOur economic growth forecast for 2018 is1.5% which, although below the20-year average of 2% is still progressive.Yes, there’s uncertainty around Brexit.Inevitably this brings caution into themarket. But, there is still demand fromthe growth sectors, and combined with alack of good quality office and industrialstock, rents are under pressure to rise.The smart landlords are refurbishingtheir offices to meet the rapidly changingrequirements of occupiers, inspiring,contemporary spaces are leadingthe way. Landlords are realising theneed to provide amenity rich, highlyserviced spaces, which together withthe occupiers fit-out, serve to aidtalent attraction and retention. Therefurbishment of Earl Grey House andBarclays House on Grey Street, areprime examples.Speculative industrial development isback on the agenda encouraged by theprospect of rising rents. Nissan’s currenttendering for suppliers also has givensome hope to developers and ownersof large factories that 2018 could be agood year. Although of course, wehave yet to see how many of thesecompanies eventually secure contractsand take space, but still another reasonto be optimistic.And finally, our region remains a primelocation for inward investments projects.Our competitive cost base, skilled labourpool, and strong universities are all keyingredients, particularly to compete for“North Shoring” opportunities.From a personal perspective. I would liketo add a huge thank you to our clients,for their continued support over thelast 12 months, and to the outstandingindividuals and teams I work with, whichcombined to make the last 12 monthsour most successful year ever, Reasonsto be Cheerful, Part 4!Earl Grey House3
OCCUPIER MARKET – OFFICESDespite wavering sentiment, occupier demand levels are rising. Availability is at a10-year low creating a market imbalance supportive of rental growth.DemandDespite 2017 take up being 12% belowthe long term average, there was a strongstart to 2018 in the office sector withtotal North East take-up in Q1 standingat 71,943 sq ft, an increase of 38% fromQ4 2017. Encouragingly, both the level ofnew enquiries and the number of viewingshas also increased pointing towards acontinuing positive picture for 2018.Within Newcastle city centre, ProfessionalServices accounted for the largestpercentage of let space in 2017 at 30%.This has continued in Q1 2018 with thesector accounting for 29% of city centretake up. With several deals currentlyunder offer in the city involving high profileprofessional firms, the sector looks set tofeature strongly again throughout 2018.Demand from the Technology, Media andTelecoms (TMT) sector also continuesto build, with a further four city centrelettings in Q1 2018 including the letting atSchroder’s newly refurbished Earl GreyHouse to Tangent plc (1,986 sq ft) whichset a new headline rent for Grey Street of 21.50 per sq ft.There is real evidence of a ‘flight to quality’in the market, with the majority of demandfocusing on the prime Grade A stock asoccupiers are increasingly looking beyondtotal occupation costs and focusing onamenity rich properties and locations.Despite the out-of-town market finishing2017 with a similar take-up to 2016,it remained 21% below the five-yearaverage. However, the out-of-town marketbounced back strongly in Q1 2018 with45 transactions completing and a total of132,749 sq ft of take-up. Deals at QuorumBusiness Park accounted 20% of outof-town transactions with new lettingsincluding 13,333 sq ft let to Utility Alliance,6,600 sq ft let to Zoopla and 5,646 sq ft letto TSG Group.AvailabilityWhilst fluctuating during the year,Grade A availability in Newcastle citycentre finished 2017 at 175,000 sq ft.This total being 15% below the 10 yearaverage, but more notably none of thisis made up of new buildings. With afurther raft of city centre lettings due tocomplete in the coming months, supplywill therefore come under increasedpressure. The development of 107,000sq ft at Newcastle Helix remains the onlycommitted scheme in the city, althoughcompletion is not due until Q4 2019.The only new construction currentlyunderway in the region is at VauxSunderland which will deliver a new citycentre Grade A building of 60,000 sq ftdelivered in at the end of 2018.Out-of-town supply is dominated by CobaltBusiness Park and Quorum BusinessPark, both having single buildings ofover 100,000 sq ft immediately availablemaking them attractive options for inwardinvestment projects. Due to the currentchallenges in funding new speculativedevelopment, the development pipeline inthe region is dominated by schemes thatHeadline rentsPrime headline rents increased by 2% in2017 to reach 23.50 per sq ft. This risefollowed HSBC taking 4,562 sq ft at CentralSquare South. Despite this increase,Newcastle continues to have the lowestprime rent of the major UK regional cities,which should attract inward investment.Out-of-town there is still a significantvariance in headline rents depending uponlocation, but the highest headline rentscontinue to be at Quorum and Cobalt with 16.00 - 16.50 per sq ft.FIGURE 1Newcastle city centre office take-up(000’s sq ft)300TAKE-UP (SQ FT)LT AVERAGE25017/Q1Durhamgate, DurhamLearning Curve16,00017/Q1Eldon Court, NewcastleTrinity Mirror12,50017/Q3500Source: Knight Frank Research201719,2002016Frank Recruitment Group2015St Nicholas Building, am PoliceEldon Insurance1502011Date2010Size6 Admiral Way, Doxford4The 21,300 sq ft lease at 2 St JamesGate taken by Eldon Insurance was thelargest city centre transaction to completein 2017, whilst region wide the largesttransaction was the 33,600 sq ft purchaseof 6 Admiral Way, Doxford Business Parkby Durham police. The most notableletting deal in Newcastle city centre in Q12018 was Turner and Townsend’s 5,200sq ft relocation to Time Central, whilstout-of-town the pre letting at Durhamgateto Learning Curve (16,000 sq ft was thelargest of quarter.2009OccupierNo. 2 St James Gate, NewcastleSource: Knight Frank ResearchKey transactions200Key leasing transactions 2017Addressare either being, or are likely to be, fundedby way of local authority intervention.
NORTH EAST PROPERTY MARKET 2018RESEARCHOCCUPIER MARKET – INDUSTRIALA lack of stock continues to hamper occupier activity. Speculative developmentremains limited, although recent deals may renew interest.DemandTake-up of industrial space in the NorthEast for 2017 totalled 4.4m sq ft, downfrom 6.7m sq ft in 2016 and well below the5-year average of 7.1m sq ft. The numberof actual transactions totalled 491 againdown significantly on 2016’s total of 602and below the 5-year average of 540.There is no doubt that these figures havebeen affected by the general lack of goodquality available stock, but also highlightthe gradual slowdown in activity inanticipation of Brexit.Of the 2017 total, 3.2m sq ft (395transactions) was let with the balance of1.2m sq ft (96 transactions) being sales.The amount of sales as a percentageis only 27% also down on the 5-yearaverage that stands at 39%. We believethis is a reflection of owners retaining andleasing assets to benefit from attractivereturns when measured against savingrates and alternative forms of investment.Take-up of units over 50,000 sq ft acrossthe North East region totalled 1.2m sq ft in2017, which is broadly similar to 2016, butsignificantly down on figures for 2014 &2015, which exceeded 2m sq ft.AvailabilityThe North East continues to suffer froma lack of good quality industrial stock.The statistics show that there is around4.2m sq ft currently available, howeveronly 485,000 sq ft of that space can beconsidered modern. Significantly, there isno new stock above 20,000 sq ft availablealthough Hellens are close to completinga development of three units of 31,524sq ft, 15,900 sq ft and 10,577 sq ft on theMonkton Business Park, Hebburn.totalling 187,659 sq ft to Ashworth &Parker Ltd and the letting of HadrianYard in Wallsend to Smulders comprising461,128 sq ft on a site of 75.16 acres.The only other new build space is UKLand Estates remaining two units inthe Dukesway Central scheme whichcomprise 20,112 sq ft and 12,276 sq ft.In terms of land supply, the InternationalAdvanced Manufacturing Park (IAMP)proposed for land north of Nissan (150ha/370 acres) has cleared most of theplanning hurdles and Henry Boot has beenchosen as the preferred developer bySunderland and South Tyneside Councils.There remain some questions on the landownership and in particular, a key part ofthe site is in the hands of a rival developerintent on bringing forward their ownproposals. This will not necessarily conflictwith the Council’s ambitions but it maydivert control away from them.The letting of L5 Intersect 19 on the TyneTunnel Trading Estate in North Shieldswas notable for the fact that it went underoffer within the first month of construction.The unit comprises 57,404 sq ft and waslet to Pryme Group and as the buildingworks were in their early stages it allowedthe tenant to have a bespoke fit out tosatisfy its production needs includingan uprated power supply and additionaloffice & welfare space.In the south of the region at NewtonAycliffe, Durham County Council hasannounced Richardson Barberry as thepreferred developer for their Forrest Parksite of 160 acres adjacent to Junction59 of the A1(M). The scheme has beenawarded funding of 13m from theNorth East LEP towards infrastructurecosts and works on the servicing is nowlargely complete in readiness for thefirst phase development.Headline rentsPrime headline rents have remainedstable at 8.10 per sq ft, which wasestablished in 2016 for a letting on a newbuild 11,000 sq ft unit on Team Valley,and subsequently 7.45 sq ft for a 26,000sq ft unit.Arguably, the letting of UK Land’s newbuild 57,000 sq ft unit on Tyne TunnelTrading Estate is more of a landmark as itwas let at a rent of 6.00 per sq ft, whichestablished a new rate for this size inNorth Tyneside.FIGURE 2North East industrial take-upKey transactions(m sq ft)The stand out transactions during 2017were the sale of the former VisageClothing warehouse in Washington2.5TAKE-UP ( 50,000 SQ FT)LT AVERAGE2.0Key leasing transactions 20171.5Smulders461,128Feb-17Unit L5, Intersect 19, North ShieldsPryme Group57,404Sep-17Former Visage Premises, Parsons Road,WashingtonAshworth & Parker187,659Aug-17Units A3 – A5 Benfield Business Park, NewcastleCard Tricks Ltd69,162Aug-17Source: Knight Frank Research0.50.02017Hadrian Yard, Hadrian Road, Wallsend1.02016Dec-17201562,7782014Ikea2013Unit 11 Follingsby Park, urce: Knight Frank Research5
INVESTMENT MARKETInvestor interest in the North East, particularly toward industrial stock, remains at ahigh level. Availability however, continues to restrict investment volumes.FIGURE 3Newcastle office investment( m)200160In a year of few transactions, domesticmoney continued to dominate activity. UKbuyers accounted for 87% of investmentin 2017. The only sale to an internationalbuyer was the acquisition of MaybrookHouse to Chinese firm TusPark for 5.65m.140Arising from the all issued share purchaseof SM Newcastle, the acquisition of 1-3St James Gate by Palace Capital PLC for 20m was the only sale to complete over 10m in 2017. The mixed use developmentcomprises of a 61,000 sq ft office and tworetail units. The purchase price reflected anet initial yield of 8.25%.Following the Keel Row House sale, primeyields moved to 5.75%. At this level,prime yields are 100 basis points abovethe market peak of 4.75% recorded in2007. Yields for good quality, well locatedsecondary stock were around 8.25% atyear end.40In August, Watkin Jones Group, via theirSPV Planehouse Ltd purchased Keel RowHouse from Aviva Investors for 8.85m.The 23,794 sq ft property is fully let toWard Hadaway until 2030. Notably, thedeal reflected a net initial yield of 5.57%, arecord low for the city in this cycle.IndustrialMaya Capital LLP extended their portfolioin the North East in September, with theacquisition of Bede House at All SaintsThe sale of the Royal Mail Sorting Officeon Team Valley at 16.15m reflectingan initial yield of 5.22%, was the lowestinvestment yield for an asset of this natureon record, and suggests that prime yieldshave reduced by 50 bps to 5.50% for a 10year term.Royal Mail Sorting ce: Knight Frank ResearchFIGURE 4North East industrial investment( m)160 MLT AVERAGE14012010080604020Source: Knight Frank Research2017201620152014201302012The multi-let industrial estate sectorhowever, was again the best performingsector on a national basis. The large singleownerships in the North East mean that fewestates traded in 2016. Notwithstandingthis, this sector of the market remains themost attractive to institutional investors.1002011Multi-let estates were also in demand andthe sale of the UK Land Estates portfoliofor 41.79m reflected a yield of 7.27% andconsisted of 10 non-core multi let assets.This is a 200bps change from where theseassets were trading five years ago.1202009The industrial market continues to go fromstrength to strength. Transaction volumesin 2017 were 110m, an increase of 69%on 2016 and an indication of the underlyingdemand in this sector. MLT AVERAGE1802010Following a relatively strong 2016 interms of trading activity, the reluctanceof landlords to bring assets to marketin the absence of suitable alternativeopportunities meant overall volumessuffered. Investment turnover for the yearreached 50m in the city centre, 49%below the 10-year average for the city.Interestingly, actual deal number was upwhen compared to 2016, but it was theabsence of higher value sales that meantinvestment volumes remained below thelong-term trend.Business Park for 4m. The 38,000 sq ftproperty is multi-let, with tenants includingWealth Management Systems Ltd, Turner& Townsend Group Ltd, Ingeus UK Ltd,and London & Country Mortgages. Assetsalready owned by Maya Capital include,units 9 and 15 B&C at Cobalt BusinessPark, both bought in 2015.2009Offices
NORTH EAST PROPERTY MARKET 2018RESEARCHKNIGHT FRANK VIEWPATRICK MATHESONPARTNERThe strong start in Q1 is expectedto continue through the rest of2018, with continued upwardpressure on prime rents due tothe lack of supply in the market,particularly in central locations.Occupiers will continue to befocused on the higher qualityGrade A space as the ‘flight toquality’ continues. Landlordsproviding the right, high qualityand amenity rich space will nodoubt be the beneficiaries.Whilst the co-working revolution isyet to fully reach Newcastle, thereare a number of major operatorswho are starting to circle themarket, looking to benefit fromthe flourishing tech scene andchange in what occupiers needand desire from their office space.Much will depend upon the rightbuildings being available for them,which is certainly a challenge, butthe city and the region is certainlyready to embrace this newproduct and culture.SIMON HAGGIEPARTNERPETER BOWDENPARTNERDemand is strong for largerunits between 50,000 sq ftand 150,000 sq ft, which ispartly being fuelled by Nissan’slaunch of Nissan’s next Qashqaireplacement vehicle in 2020.Interestingly in anticipation ofBrexit, Nissan is encouragingmany of its suppliers into theregion to avoid potential dutieson its parts post Brexit. Themarket is otherwise proving tobe resilient. We expect to seecontinued enquiries in the sub10,000 sq ft range, but lessactivity in the mid-range sizebetween 15,000 sq ft to 35,000sq ft. We believe that there willcontinue to be steady demandfor larger modern units in the50,000 sq ft to 150,000 sq ftsize range but fewer enquiresfor buildings in excess of150,000 sq ft.It’s always interesting to lookback and see what we saidpreviously for the year ahead.Last year we talked about thelack of Grade A office spaceand the potential for rentalgrowth, probably not hard topredict. This proved correctand this continuing marketimbalance looks set to push rentspassed 25 per sq ft. We willsee more developers adaptingtheir buildings and design formanagement to improve qualityand amenity, in pursuit of techsector occupiers.For industrial, we reviewedthe growth in rents which wasencouraging the return ofspeculative development, but itwas also the speed at which UKLand’s 57,000 sq ft new build atTyne Tunnel went under offer inthe first month after constructionstarted, which should give furtherencouragement in that market.DICKON WOODPARTNERThe market has shrugged off theinitial concerns regarding Brexitand yields continued to hardenthroughout 2017 and new flowsof global capital maintainedpressure. We expect to see anincrease in corporate activityin 2018 and believe that officeyields in the city centre still havesome way to go.Rental growth continues toprovide comfort to investors inthe office and industrial sectorsand assets such as final milelogistics and collaborativeworking hubs will continue toappeal to investors looking tofuture proof their portfolios.Because of the prospects offurther rental growth in ourmarkets, and despite Brexit, weremain more than confident aboutnext year’s investment market,provided product is available.7
COMMERCIAL RESEARCHLee ElliottPartner, Head of Commercial Research 44 207 861 [email protected] MansfieldAssociate 44 207 861 [email protected] OFFICEPeter BowdenManaging Partner 44 191 594 [email protected] MathesonPartner 44 191 594 [email protected] MARKETSDickon WoodPartner 44 191 594 [email protected] HaggiePartner 44 191 594 [email protected] Frank Research provides strategic advice, consultancy services and forecasting to a widerange of clients worldwide including developers, investors, funding organisations, corporateinstitutions and the public sector. All our clients recognise the need for expert independent advicecustomised to their specific needs.RECENT MARKET-LEADING RESEARCH PUBLICATIONSRESEARCHRESEARCHThe global perspective on prime property and investmentABERDEENUK REGIONAL CITIESOFFICE MARKET REPORTSPRING 2018OFFICE MARKET REVIEW2018THE WEALTH REPORT 2018BAL WEALTH ADVISORYworld’s prime property marketsy team leverages market-leading researcheptional service to our global private clientse & property, perfectly.tfrank.com201812th EditionThe Wealth Report2018Regional Offices YearEnd Review 2018The London Report2018Knight Frank Research Reports are available at KnightFrank.com/ResearchAberdeen OfficeMarket Report - 2018Important Notice Knight Frank LLP 2018 – This report is publishedfor general information only and not to be relied uponin any way. Although high standards have been used inthe preparation of the information, analysis, views andprojections presented in this report, no responsibility orliability whatsoever can be accepted by Knight FrankLLP for any loss or damage resultant from any use of,reliance on or reference to the contents of this document.As a general report, this material does not necessarilyrepresent the view of Knight Frank LLP in relation toparticular properties or projects. Reproduction of thisreport in whole or in part is not allowed without priorwritten approval of Knight Frank LLP to the form andcontent within which it appears. Knight Frank LLP isa limited liability partnership registered in England withregistered number OC305934. Our registered office is55 Baker Street, London, W1U 8AN, where you maylook at a list of members’ names.
NORTH EAST PROPERTY MARKET REPORT 2018 RESEARCH. 2 Please refer to the important notice at the end of this report CONTENTS 03 FOREWORD 04 OCCUPIER MARKET - OFFICES 05 OCCUPIER MARKET - INDUSTRIAL 06 INVESTMENT MARKET 07 KNIGHT FRANK VIEW. 3 NORTH EAST PROPERTY MARKET 2018 RESEARCH
