Given that Theresa May recently triggered Article 50, it is prudent to review the current situation regarding Brexit, Northern Ireland (NI) and commercial property. Triggering Article 50 moves the exit of the UK from the European Union (EU) from a theoretical notion to a reality.
The forecast prospects for the economy and the commercial property industry in the aftermath of the referendum were initially poor, but, these predictions have not been realised with moderate economic growth and the market demonstrating a ‘business as usual’ attitude.
Whilst NI has so far fared well in the headwind of Brexit, there are challenges and opportunities ahead. Here we consider the current market climate and highlight some of the key issues.
During 2016 investment volumes were substantially reduced compared with the preceding three years. The first quarter of 2017 has picked up where 2016 left off, with limited stock and ‘Flight to Quality’ investor behaviour. Good quality stock is performing well and attracting multiple expressions of interest, but secondary stock is suffering a dent in value and liquidity. Currently, the key challenge in the Northern Irish investment market is opportunity, not uncertainty. Clients remain frustrated by the lack of opportunity, having appetite to spend, but still being mindful of how Brexit may affect the value and performance of a purchase.
There was a healthy level of retail activity in 2016. Consumer confidence, good credit conditions and the attraction of NI to Republic of Ireland (RoI) shoppers helped to ensure good performance after the referendum. Retail activity has started strongly in 2017, with a generally similar trend to 2016. New and existing operators are showing appetite for NI and are actively considering potential opportunities in new locations. The outlook is more challenging and the retail sector is beginning to feel the effects of increasing inflation, falling real incomes, business rates reviews and the National Living Wage. This may be the beginning of a change in sentiment and increasing caution from retailers and shoppers alike.
The office market performance was strong in 2016, with a 27% increase in take-up and 9% increase in prime rent compared with 2015. We have witnessed a steady flow of requirements since the referendum and 2017 has continued in the same fashion as Q4 2016 with stable take-up and strong demand. During 2017, the new Concentrix and Allstate offices will complete, speculative development continues at City Quays and the shared co-working space at the Ormeau Baths Innovation Centre will open. NI is still seen as a strong city to locate, primarily for its skilled workforce, good staff retention and cost competitiveness. At this point there is no sign of developers or occupiers confidence in the Belfast office market wavering.
Industrial take-up in 2016 totalled 2.3 million sq ft, a 37% increase on 2015 (although inflated by one large transaction). Take-up in Q1 2017 has continued in the same healthy tone as late 2016, with the trend of demand from local indigenous companies expanding or relocating continuing. Despite attractive market conditions there continues to be a lack of quality product. In response refurbishment of existing stock and an increase in design and build projects is occurring. These are notable differences in market activity compared to preceding years and an indication of continued market confidence.
Commentators, both north and south of the border, have indicated that there is universal reluctance to see the re-introduction of physical border barriers and controls. Whilst Theresa May has made clear her stance on a hard Brexit and she has also stated that there will be no return to the ‘borders of the past’, she has not yet clarified how the border will operate.
Whilst NI’s primary trading partner is the UK, the RoI is the largest market for Northern Irish exports. Theresa May’s intention to remove the UK from both the EU Single Market and the customs union poses questions for the operation of cross-border trade and the cost implications for businesses. Her reassurance that the border will be as ‘seamless and frictionless as possible’ has been criticised and the worst case scenario would see the introduction of tariff controls on the border.
Politics in NI during 2017 has been dominated by instability with the collapse of the power-sharing executive, a snap election and extended talks to restore local government. Whilst NI demonstrated resilience in the initial aftermath of the Brexit vote, local political instability compounds the Brexit and, to a lesser extent, Trump-related uncertainty for the region and has the potential to hinder further growth. Without an Executive in place, there is no budget, no economic strategy and no coherent voice championing NI in Brexit negotiations.
In 2016, HMRC agreed that the responsibility for setting corporation tax would be devolved in NI. It was intended to set NI corporation tax at the same 12.5% rate as the RoI. The continuing political situation makes it highly unlikely that the proposed reduction will take place. Although, reductions planned at a UK level could be advantageous in attracting FDI to the region, but may also negate the competitive advantage that NI was anticipating over the other UK regions.
NI currently receives EU funding of around €600m annually. After 2020, there are no guarantees of access to these funds and no certainty that the UK government will make-up this shortfall. Currently, EU funds provide considerable grants to the community and voluntary sector which is also an important employer in NI. Any significant loss of funding will contribute to reduction in demand for commercial property from this sector.
Foreign Direct Investment
NI has been very successful in recent years in attracting FDI and establishing itself as a cost-effective hub for fintech companies. The knowledge economy, cyber security and tourism sectors in NI are also booming. Given the continued positive performance of the Northern Irish economy, and contrary to popular belief, the EU referendum result has not inhibited the flow of FDI with a 25% increase in FDI announcements during 2016 demonstrating that NI continues to be appealing to foreign investors.
Tourism as a key economic driver
Since the signing of the Good Friday Agreement, tourism has become a key economic driver. Increases annually in visitor numbers and spend continued through the global financial crisis, and Belfast is one of Europe’s hottest short-break destinations. The post-referendum depreciation in sterling further boosted tourism in the second half of 2016 and there is significant hotel development occurring. NI’s tourism potential has shown resilience to challenges in the past, and it is expected that this industry will continue to grow despite the uncertainty that Brexit creates.
Northern Ireland fared well in the initial challenges following the EU referendum vote, but its unique position as a gateway between the UK and the EU creates a specific set of issues, the repercussions of which are currently unknown. There is comfort, however, in the healthy performance of the commercial property market in Northern Ireland since the referendum. We expect that the industry will continue in the same tone because for the most part the sentiment is business as usual, but with just a little added caution.