Northern Ireland’s Real Estate Sector – The Way Ahead

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Northern Ireland’s Real Estate Sector – Covid, Recession & Beyond

Business Eye hosted a Round Table Discussion held in the unique surroundings of The Resolution Centre Belfast, the Bar Council of Northern Ireland’s meeting and mediation facility in The Boat, Donegall Quay. An influential panel looked at Northern Ireland’s real estate/ commercial property sector postCovid, at the challenges it faces, at how it is performing and at what the future holds.

The Participants

Peter McCall, Head of Real Estate & Managing Partner, Millar McCall Wylie, and one of Northern Ireland’s top ranked property lawyers.

Gareth Graham, Chief Executive, Oakland Developments, the firm behind Belfast’s Merchant Square, now occupied by PwC and currently developing an aparthotel in Queen Street. Gareth also heads up Belfast Commercial Funding, a new player in the property finance market. Donall McCann, Founder & Chief Executive, Duneane Asset Management, and former Head of Regional Capital Markets at Lambert Smith Hampton.

Martin Mallon, Managing Director, South Bank Square, one of our largest residential developers with interests in the Belfast residential market and the hotel sector. Ryan Walker, Managing Director, Magell, a property investment and development company with interests in the office and retail sector. Magell is also the owner of Urban HQ, the flexible workspace in Belfast City Centre.

Richard Buckley, Business Eye

RB – Let us start with a general question to each of you. How do you view the real estate market here post-Covid?

PM – Wind back to the easing of the first strict lockdown in 2020 and you will remember that the housing market went crazy and it has stayed strong until recently. The commercial sector is harder to explain but we’ve just had our strongest two years, transacting £250 million worth of business and doubling our staff. Why? I think there is still a feeling that Northern Ireland represents good value for money for investors. When any good real estate goes on the market, it’s snapped up very quickly.

DM – In 2020, we’d just set up Duneane AM to invest in a city we knew and a city that we think has a way to go. I think we’re coming out of Covid better than most other comparable cities. We have more people back in the city working as a percentage of workforce than say Dublin or London. We’ve seen Merchant Square, Paper Exchange and The Ewart being built driving this period and the buildings seem to be leasing up well. What’s clear is that every landlord needs to have smart and the best in class buildings.

As business people here, we tend to plough whatever is happening on the political front. However, external investors don’t see it like that. They look for stability.

RW – I hope we can look back and view Covid was a once in a lifetime event. There is no doubt it has caused considerable pain in this industry. We were all looking for some post-Covid stability but it hasn’t quite worked out like that. We have all had to look at our businesses through a different lens, but a lot of us have come out stronger. There is uncertainty, but there is also opportunity.

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GG – There was a real sense of optimism coming out of lockdown, as Peter said. But more recent events, the issues caused by what happened on September 23rd in London. Rising inflation and interest rates have taken their toll and, as sure as eggs are eggs, they will affect our sector. There will be difficulties ahead.

MM – The fact that construction was allowed to keep going during Covid was a big positive factor. We kept going, and as a region, we’re very good at that. Certainly, we came out of Covid a lot stronger than many of us would have expected. But the 23rdSeptember mini budget changed a lot of that.

RB – So the financial crisis caused by the mini budget is the big issue. But what about on a local level? What are the challenges facing real estate?

DM – Our city needs people back into workplaces. I’d encourage anyone – private or public sector – to get their people back to work on whatever basis works best. We do have a new way of working but we can and have adapted to that. On an optimistic note, there are properties across all sectors on the market at the moment and the competition from buyers is strong. Our market remains of interest to cash rich family offices. Outside NI,investors continue to look for perceived value.

MM – But we don’t want people coming because we’re seen as cheaper or cheapest. It is all about value. I agree on office working and I think employers are trying to hit their own sweet spots when it comes to hybrid working. In terms of challenges, construction costs are the biggest alongside the availability of labour.

GG – That is true. Construction costs are going up, labour costs are going up, energy costs are going up and the cost of funding is going up. All of that will have an impact and I think we will see a slowing down.

PM – Do you see all of that having an effect on house prices, Martin?

MM – No. It’s not like is was back in 2008. No house builder I know has stock built and not sold. You sell as you go along and, at most, you might be half a dozen houses ahead. We all knew that 2% interest rates would not be around forever. However, what 23rd September did was to take rates from 2% to 6% overnight. The crucial thing for the housing market is the availability of mortgages so we could be in for a period of stagnation until things settle down. Builders cannot afford to sell houses any cheaper than they are at the moment.

RW – I think the high inflationary environment we are living through makes property attractive as a safe harbour to invest in, but there’s going to be a difference between the price expectations of sellers and where buyers see values. We’ve already seen, and will continue to see, opportunistic buyers coming to the market. We are moving from an era of low interests rates to a more prolonged period of higher rates and I do think that impacts yield profiles and values. If your debt costs are more than 5% then an asset producing less than 5% yield does not make a lot of sense.

PM – We have to mention the fact that we don’t have a functioning government in Northern Ireland. Therefore, we have nobody selling Northern Ireland at governmental level. In addition, we have major infrastructure problems that aren’t being addressed. If you compare the political class here with the political class in the Republic, there’s a night and day difference from a pure business perspective. MM – It’s scandalous that we don’t have an Executive to draw down the budget that’s earmarked for Northern Ireland. No one can justify a situation like that.

GG – There is an incredibly difficult road ahead and we have no one driving the bus. We all go out and sell Northern Ireland and the first question we all get is about instability. Yes, we live with it and we manage our way around it. The world still turns. But it should not be like this.

RW – It seems a fixation on constitutional ideology has hijacked the business of successful government. As others have said, we have a great resilience. Uncertainty is our certainty. However, it really impacts institutional buyers and investors from beyond these shores and it affects our ability to pull capital from external sources.

PM - You could link that in, Ryan, with the lack of an engaged banking sector, which has largely pulled its horns in since the financial crisis. We have some alternatives, and Gareth can talk about Belfast Commercial Funding, but the shortage of funding is something that needs to be addressed.

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DM – One problem we have is that we don’t have a bank whose core decision making function lies in this city. We’re not big and scale becomes a problem for us when it comes to external money. I think it’s a huge problem for the entire business community. Not just property. Property investors and developers can, however, find alternative funding, it has proved this.

GG – It’s true. Northern Ireland has no indigenous banking system. When trouble arrives, they pull the shutters down. In their defence, they’re very constrained in what they can lend. But there has to be options for businesses who need funding. As interest rates creep up, it’s going to become even more difficult.

Belfast Commercial Funding was born out of my own experience of trying to raise funds for Merchant Square. We went to every financial institution here and in the south and we ended up travelling the world to raise the funds. None of the funding came from the island of Ireland. It came from New York and it came from London.

What we need is to get more nonbank funders into our market. If the banks can’t or won’t fund, and there is no political pressure on them, there is space for alternatives.

MM – What about developments which are talked about but never get off the ground? We seem to have had a few, and it can’t help when it comes to creating the right perceptions to institutional investors and others outside of Northern Ireland.

GG – That’s something we do better than anyone else. We are great at announcing big schemes that never happen. When we were planning Merchant Square, the banks here told us that there was no need for it, no demand. But we’ve got to keep fighting against the kind of thing.

RB – We’re sitting here with quite a few office developments in sight. What is the potential for the office sector?

GG – There’s a temporary oversupply where there used to be a shortage. Fantastic building, brilliant space, great finish but a combination of Covid and more recent events, it’s going to take time for those to finish letting up. Once they do, there will be new opportunities.

DM – But that’s what always happens, Gareth. The last financial crisis left us with so-called white elephants. It might be Covid, it might be a lack of funding, but we will see space being let. We are seeing buildings leasing up, and we are seeing the emergence of a distinct and prominent offices zones in Belfast for the first time.

We need something to set us apart. It won’t be tax because there will soon be a big gap between us and the Republic on corporation tax. What we do have is dual market membership; pressing on the benefits of this should provide huge opportunity.

MM – I’d go further. I’d say that this is the golden opportunity for this place in the business sense. This is where we can really make gains. But no one is going to come unless that know it’s here for good. Of course, there is no logic in there being too many checks on a lorry load of goods coming across on the ferry for our supermarkets. Surely, these difficulties aren’t insurmountable. negotiations , we could end up with access to two big markets and a more level playing field on tax with ROI , which would be a game changer.

DM – We have a position where the American government is invested here, the British government is invested here, the Dublin government is invested here and the EU is the same. We’ve got four of the biggest players all involved for the right reasons. We could not have a better line-up.

MM – Maybe the British government has worked out that this is their opportunity for this place not to cost them anything. With dual market membership, over time, we can go it alone.

PM – The business community has been shouting these advantages from the rooftops for past few years. Scotland’s government and its business community would bite your arm off for what we have. We really have to grab this and take advantage of it while we can.

MM – I keep coming back to it, but we need to make sure that it stays this way and that everyone knows it is staying this way. Investors will not invest if the goal posts are going to shift in three years’ time.

RB – We’re here in the heart of Belfast. Do we need a masterplan for the city? And how do we encourage more residential development here?

MM – We’re way behind other cities in terms of urban living. There are reasons for that, of course, going back to the bad old days. PM – There new student accommodation beside the Ulster University campus is very impressive. We’re getting kids used to living in the city centre but they won’t be able to live here, as things stand, once they graduate. That’s a crying shame.

MM – When you say masterplan, I get the shivers. We’ve had plenty of masterplans which have ended up gathering dust on shelf somewhere. We need to sort out the basics – the planning system, the water and sewerage infrastructure, the surplus of bureaucracy around development.

PM – I know that you had plans to develop Fanum House in Great Victoria Street for residential use, Martin.

MM – It’s a good case in point. We’ve been talking to the authorities about demolishing the old 1960’s office block and replacing it with a 17-storey build to rent apartment building but it’s been knocked back at the pre-planning stage. So, never mind construction costs, funding and other hurdles, if we can’t get a positive regeneration project through the pre-planning, stages, it’s all going to be very difficult.

The Deloitte Crane Survey showed that where Liverpool has built 2,000 apartments and Manchester more than double that, Belfast had built 34. Why are we not building? Because it is too difficult to get planning permission. Councillors need to be educated about what city centre living means and what it can do for the regeneration of the city. There is just no foresight and they’rereading off the wrong set of rules.

The role of the planning service is to be facilitate development, not to stand in its way.

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RW – There exists a ‘Northern Irishism’ whereby there is nearly a stigma attached to lodging a planning application. It’s like the cards are stacked against you from day one; perceptions of developers trying to make profit at all costs. Instead of planning being a collaborative process where you are engaging co-operatively, it feels as though you are stabbing in the dark. It sometimes feels like pushing a ball up the hill.

GG – I’ve had plans that have been in the process for up to 18 months with no sign of any decision. Applications go out to various statutory consultees and all it takes is one or two of those to ask for an extension and the process goes on…and on.

MM – The bottom line is that planning must serve its basic function. The Planners should be able to take a planning application, on which thousands of pounds has been spent, and process it within a reasonable timeframe, engaging in a positive twoway conversation along the way.

RB – Can we touch on a couple of areas fairly quickly. Hotels and retail.

DM – We’ve had a good summer on the hotel front. We’re up 40% on our room rates. But we need tourism to continue to grow. But, as things stand, there is demand for rooms in the city. We wouldn’t like to get back to an oversupply situation but that needs to happen in a way to ultimately grow overall tourism numbers.

RB – What about business tourism?

GG – The operators who are taking on our new aparthotel, Room2, have a cross section of guests who they’ll try to attract – families, tourists, business visitors. That mix covers all bases. Any visitors are good news for a city like Belfast.

DM – There is a demand for rooms and that will help encourage more of the big hotel operators to come in here. They’ll only come to places where there is a proven demand.

MM – I’ll repeat what I said earlier. It’s never good to be the cheapest. We’re definitely not the cheapest when it comes to hotel stays any more and it’s a good thing. We still have a way to go. We’ve all seen tourists knocking around Belfast on a Sunday morning with nowhere to go. So we need to work on that, and on the state of our city centre. It’s about getting the basics right. RB – And what about retail, Ryan?

RW – It seems like a long time since retail was the darling of the property market. We’ve seen massive structural shifts, a big change in the landscape, but we can’t group retail into one big category. Some retailers are doing really well, others are struggling. We do have too much retail space, that’s for sure. It’s all about creating the right offering. There are challenges in the shopping centre space, where inflation is impacting on tenant service charges and general occupational costs. Also, rates are unreasonably high and that doesn’t help matters.

Retail parks are particularly strong and represent a liquid part of the market. They’ve also proved resilient through Covid. So a bit of a mixed bag, but retail isn’t a bad proposition in terms of yield values and there is most certainly a future; you just have to be prepared to take the rough with the smooth.

DM – There is a market for retail definitely. But the current issues like energy costs and inflation are causing problems. You’re right about rates... they’re far too high but the problem is the outdated system, they are a big issue, I think. But the cost of living crisis means that it’s a time more than ever to keep close to all retailers and work through this period together. ’

But we have retail assets on the market right now. Rushmere in Craigavon is the prime example. And it’s attracting interest from smart people who know retail well – it’s a good sign. RW – Retail is cyclical, let’s not forget that. If you can get the right fundamental asset and develop it well, the time will come when it comes back into focus.

MM – The other challenge for retail is, as the high street shrinks, what to do with the old assets? Can they be repurposed as offices or residential, for example?

RB – Let me ask you each one closing question – what does the future hold? Are you optimistic or pessimistic?

PM – I’m optimistic. If we could address the problems we’ve discussed here today, the sky’s the limit.

DM – We’ve kicked the politicians and the banks a bit today, but all for the good! We have to work hard together to connect all of us as a business community better and to sort out our infrastructure issues. But we can do good things. I’m optimistic.

RW – There are reasons to be optimistic but some challenges to overcome. We’re resilient so let’s keep going.

GG – We’ve got more potential than any other UK region. Stability would help to unlock that potential.

MM – Look at what we’ve been doing. We’ve been running uphill against the wind. Imagine what it will be like when we can run downhill with the wind at our backs...