There were some mixed messages for the Belfast office market during 2014. The good news is that rents have risen from an eight-year static of £12.50 per sq ft to £15 per sq ft – a new high for the city – owing to a lack of prime space.
And, according to agent Lisney, take-up in 2014 was 350,000 sq ft. CBRE says that 71% of this space completed from July onwards, a result of several large deals – including the 28,000 sq ft Baker McKenzie letting at City Quays 1 at Belfast Harbour (pictured) – going through in the second half of the year.
Other significant lettings in 2014 included US bank Citi taking 15,600 sq ft at the Titanic Quarter, and Concentrix taking 36,000 sq ft at Concentrix House.
The importance of these 2014 deals, says Lisney, is that 87% of the space was taken by the private sector; traditionally the Northern Ireland market is dominated by the public sector.
There is still 57,000 sq ft to let at Belfast Harbour’s City Quays 1. Property director Graeme Johnston is confident the building will be filled by June, and then work can start on the 124,000 sq ft City Quays 2.
However, the traditional central business district in the city centre has little in the way of large grade A buildings.
While there is just over 180,000 sq ft available (roughly the same as in 2013), Lisney managing director Declan Flynn says: “That number is made up of lots of very small units. Only one CBD building – The Soloist – has a 30,000 sq ft floorplate.”
The scarcity of available space means take-up will likely be down in 2015, especially in the CBD. Although when asked, agents were reluctant to provide a take‑up figure for 2015 at this stage.
The problem is three-fold: lack of developer confidence, low rental levels, and lack of bank funding, which dried up at the start of the downturn. While there is consent for 2m sq ft of office space in the CBD, Flynn says: “Somebody needs to take the risk and build a building, but development is not coming out of the ground because of rents and the banks.”
And herein lies Northern Ireland’s primary development constraint – getting money from the banks.
Speaking at EG’s Belfast question time in November, William McCulla, director at Invest Northern Ireland, said he wanted “banks to look a little bit more at speculative development, because its risks have been much reduced”.
The low rents are also an issue. As Stuart Draffin, director, head of agency at Lambert Smith Hampton, explains: “Although there is a healthy demand and a limited supply of grade A office space, the most recent lease terms secured don’t yet justify new-build activity. Banks are definitely keen to discuss proposals again but it is understandable they are nervous about speculatively supporting a new-build scheme that, to make it viable, would require rental terms not previously seen in Belfast.”
Having few high-quality existing buildings also means there is concern that the lack of space will affect foreign direct investment.
Flynn says getting inward investment, – and Invest Northern Ireland’s tireless efforts to attract FDI – is a double-edged sword, given the level of rents. He says that he would rather INI did not push the affordability of the province as a selling point. “It’s a self-defeating approach. You can say ‘I want to get investors over here and it’s £12.50 per sq ft’, when it’s not economically viable to build for that.
“We are so far behind other UK cities – Bristol rents are £28.50 per sq ft, Edinburgh is £29.50 per sq ft and Newcastle’s headline rent is £21.50 per sq ft – that if INI said our rents were £17 to £18 per sq ft, in my view that would give the springboard for buildings to get started.”
He adds: “It doesn’t make sense to build at the level rents are at now.” Even with negligible land costs it is around £150 per sq ft to develop a building so why build at a rent less than £16 to £17 per sq ft. “We’re cheap,” says Flynn, “but nothing is getting built because of that – except in the Harbour Estate, where they have very low costs and no borrowings.”
Refurbishment of buildings will also be important in delivering supply, says CBRE director David Wright. He adds: “We have already started to see this happening in buildings around the city centre, with the owners carrying out refurbishment programmes this year.”
The word “development” comes up time and again in the Belfast market. Despite these worries, overall sentiment in the city is generally positive, given the recent deals at £15 per sq ft for Baker McKenzie at City Quays 1.
Because of this rise in rents, Lisney director David McNellis says he hopes to see the return of cranes to the Belfast skyline, creating new office space in the traditional CBD, in the next 12 to 18 months as confidence slowly returns and developers utilise that 2m sq ft of planning consent.
However, agents declined to speculate which schemes are likely to come forward in this period.
That crane-filled skyline depends, of course, on how quickly the funding and financial situation can be sorted. Unfortunately, that is a waiting game.
Distance a problem?
While the Belfast market is bemoaning a lack of grade A space in the city, there is still available space at Belfast Harbour and Titanic Quarter. However, distance is a problem for some firms.
These new buildings are by the waterside and only a 10-minute walk to the city centre, but there is a perception they are too far from the amenities of the city and the traditional CBD.
“These new developments are relatively close to the city centre but there is a lack of facilities down there and workers want to be close to the shops and leisure facilities,” says Lisney’s David McNellis.
In defence of his development, Graeme Johnston, property director at Belfast Harbour, says: “The distance issue is not something any FDI prospect has raised. It appears to be a local perception, rather than something with any real basis.”
Corporation tax
Corporation tax is a major talking point in the province. The rate stands at 21%. But the problem is that in the Republic of Ireland it is just 12.5%, meaning companies are more likely to be attracted to taking space on that side of the border.
But in January, the government announced the Corporation Tax (Northern Ireland) bill, to devolve tax powers to the Stormont Assembly and let it control its own rate from April 2017.
It is estimated that, should the rate be lowered, around 34,000 businesses would stand to benefit, including 26,500 SMEs.
Theresa Villiers, secretary of state for Northern Ireland, says: “There is strong support for this change across all five of the parties in the Northern Ireland Executive and the business community, who believe it would provide a major incentive for domestic businesses to invest further in Northern Ireland and significantly increase foreign direct investment.
“Given the land border shared with a lower-corporation-tax jurisdiction, this measure has the potential to create thousands of new jobs and stimulate crucial growth in Northern Ireland’s private sector.”
