DTZ - General - Newcastle, North East of England

Date: 16 Mar 2010

DTZ: investment stock shortages creating opportunities for NE landlords.

By Tom Elviss, senior investment surveyor at DTZ in Newcastle.

The last 12 months have seen strong levels of investment activity in the Newcastle office market and there continues to be keen competition for well let investments. With DTZ involved in 40% of the deals, the last year has seen £173m traded in 9 transactions.

The shortage of stock in the market has created an opportunity for landlords to take advantage of competitive bidding and a hardening of yields in order to gain a premium for their investments. There are a number of factors driving property values upwards:

· the UK based funds continue to see a large influx of cash putting them under increasing pressure to purchase property. IPD research identified £2.5bn of capital raised by pooled property funds over Q4 2009. Of particular note were the inflows into Aviva Investors, Legal & General, and Threadneedle managed funds and the SWIP Property Trust. These institutional investors continue to compete for prime, well let property and have broadened their investment requirements to include the north east;



· there are a number of Vulture Funds who have raised equity and are looking to acquire stock with debt backing. The Vulture Funds have undertaken significant fund raising and have a combined fire power of over £36bn; and



· a shortage of stock. In late 2008 and the start of 2009 it was the UK based institutions selling property in order to pay down redemptions. However, as the economy and property investment market have recovered there has increasingly been a shortage of good quality stock on the market, particularly in Newcastle. Where good quality buildings have become available they have received considerable interest, an example of which is 52-60 Grey Street which was placed under offer to a UK fund after a marketing period of just one week.


Prime yields in Newcastle now stand at 6.25% for Grade A, well let, town centre offices. This is below the 10 year average prime yield of 6.50% and below the 20 year average of 6.98%. This is also an inward shift of some 125 bps when compared with the same period a year ago. At these historically low levels there is an opportunity for landlords to take advantage of current market conditions to sell into a market benefitting from a shortage of stock and high levels of demand.

The investment market does however remain a two tiered market with strong institutional demand for prime, well let stock. Secondary investments offering less secure income streams, in lower quality buildings, continue to trade at a significant discount to historic levels with some deals still being concluded at 10%+ yields.

Tom Elviss

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