Last week in Belfast, MSCI launched a major project with Ulster University to inject greater transparency into the Northern Ireland investment real estate market.
Unlike both the Republic of Ireland and the UK, no specific index exists for investors in Northern Ireland, heavily constraining the level of information and analytics available to professional investors. The new report takes the first steps in aligning both Belfast and Northern Ireland with their European peers in competing for the growing pool of international capital being allocated to real estate by institutional investors.
The significantly improved economic climate in both the UK and the Republic fuelled a major rebound in commercial property in both countries during 2014, most crucially in regional markets outside their respective capital cities.
This strong investment performance, driven by recovering rents and tightening yields, meant that returns reached levels not seen in either market since before the market crash. The dramatic recovery in both these markets fed through to growing investor returns in Northern Ireland, resulting in a total return of 10.9 per cent last year.
Northern Ireland real estate had a good year in 2014. It outperformed traditional institutional investments including UK equities, which returned just 0.5 per cent for the calendar year, but lagged UK government bonds which returned 12.9 per cent. Property equities (predominantly REITs and listed property companies) performed strongly with a return of 24.3 per cent, reflecting analysts’ increasingly optimistic view of future rental expectations, with economic recovery bolstering the retail sector in particular.
Capital values
As in other markets, capital values in Northern Ireland had fallen heavily since their previous peak and, by the end of 2014, values were still 31 per cent lower, compared with 17 per cent down for the UK and a substantial 56 per cent down for the Republic. A strong level of income return (rather than accelerating capital value growth) was responsible for the 10.9 per cent total return achieved in Northern Ireland, contrasting with both the rest of the UK and the Republic of Ireland, where impressive levels of capital growth drove the markets higher.
A high income return combined with strongly discounted capital values to make Northern Ireland assets highly competitive compared to the rest of the UK and other European markets. As in the Republic, this has tempted investors into the market, with transaction volumes growing through 2013 and 2014 as expectations of strengthening values and increasing rents feed through into investor sentiment. Belfast, like Dublin and London, has been the main focus of investor attention in these early stages of recovery.
Belfast returned 10.6 per cent in 2014, above the European average of 9.4 per cent and outperforming many major European cities including Amsterdam, Copenhagen, Lisbon and Stockholm. Belfast’s retail sector return of 10.6 per cent also exceeded the European sector average of 9.7 per cent, while Belfast offices returned 16.7 per cent, significantly outperforming the European sector average of 8.7 per cent.
The outperformance of both the retail and office sectors in Belfast was due to the continuing high levels of income return. Europe’s top-performing markets, such as Dublin and London, outperformed due to their impressive levels of capital value growth, underpinned by similarly impressive rental growth. Looking forward, the high level of income return in the Belfast and Dublin markets continue to make them very competitive for investors.
Favourable leasing
Compared to other European cities, the Northern Ireland market, and indeed the Republic of Ireland, benefit from relatively favourable leasing structures and cash-flow profiles. This combined with growing transparency and analysis, should attract a growing level of institutional capital into a market for many years neglected by international investors.
Colm Lauder is senior associate at MSCI
