NORTHERNIRELAND:COMMERCIAL PROPERTY investors now assess the Belfast market using the same risk profile as other provincial cities in the UK.
The fact that political risk is no longer a factor in the Belfast market is one of the key findings of a report ( Political stability and the Belfast real estate market) from Farrelly Mitchell. The research was inspired by the industry-wide paucity of quantitative and qualitative data on the city.
The market has been enthusiastic about political progress in Belfast and yields there fell from 8 per cent in 1996 to around 4.7 per cent at the end of 2007, as investors gained long-term confidence in the commercial market.
Because there have been very few transactions in 2008, qualitative data from leading figures in the Belfast property industry was used to extrapolate yield and rental trends between 2008 and 2013.
The overwhelming industry view is that yields have moved out in Belfast in 2008, probably to around 5.5 per cent. In 2009, particularly in cases where the sale is forced, it could go up to 6 per cent.
The outward movement in yields is attributed to the lack of available credit to investors, with banks charging up to a 2 per cent margin, in contrast to the 1.5 per cent margins that were being charged as late as the end of 2007.
The corresponding reduction in lending ratios has reduced the amount that investors can afford to pay for a building.
Poor investor sentiment towards the global commercial property sector is also reducing the amount that investors are prepared to pay for their investments.
Although Belfast office rents showed good growth between 1996 and 2001, there was negative rental growth from 2002 until 2003.
Rental growth accelerated between 2004 and 2008, with rents increasing from £12 per sq ft up to £15 per sq ft.
The report forecasts that office rents in Belfast will increase over the next five years.
Nine senior industry figures interviewed said that rents in Belfast will be higher five years from now.
Only one interviewee believed that they would be the same and none of the respondents believed that rents will fall. This contrasts with most other cities in the UK.
The outlook for retail space is less optimistic, with an expectation that retail rents will stagnate over the next few years, because of an over-supply in the market.
With office rents expected to increase in the Belfast market over the next five years, it's reasonable to expect capital appreciation in Belfast offices over the next five years. In many other UK cities, where rents are falling, yields and capital values are expected to suffer in coming years.
The key issue is that Belfast is now judged alongside cities like Edinburgh, Leeds and Bristol, rather than being regarded as an investment with significant political risk.
The growth of international investment in Belfast, the city's low cost base and its historically underperforming commercial property sector mean that it is well-placed to ride out the worldwide problems in the market.
This should present buying opportunities for investors in 2009.
•Barry Malone is a commercial property investment analyst with Farrelly Mitchell
