Depending on which commentators you read, Chancellor Philip Hammond’s autumn statement was characterised by either an ‘infrastructure splurge’ or a ‘play it safe’ approach to spending on big capital projects.
But whichever way you view it, his commitment to put £23 billion into a new national productivity investment fund was an acknowledgement that infrastructure spending will be a crucial economic driver in the coming years as the UK navigates the uncertainty that leaving the European Union might bring.
It's likely there will be investment in a combination of rail, road, energy, hospitals, schools and digital infrastructure projects in their plans and a sizeable sum will be spent on new affordable housing - but we will have to wait for details of the exact projects that will be supported.
Some £250 million extra, of course, was earmarked for Northern Ireland in the autumn statement, which the Executive will decide how to spend, and which could be used to support infrastructure projects.
Recent polls have shown Belfast slipping to 14th in the league table of the UK’s best cities to work and live and placed it in the top 10 slowest expanding regional cities in the UK. There is no doubt that infrastructure investment has a part to play in improving that performance and a long term pipeline of projects would surely be welcome to the construction sector and business community as a whole.
The British Property Federation recently said that “prioritising infrastructure investment attracts inward investment and helps the UK to remain competitive… infrastructure is the catalyst for regeneration, which in turn delivers jobs and creates the spaces we need to work and live”.
In Belfast, there is a positive base upon which to build. The city’s transformation over the past decade has been significant. With over £3 billion of investment in the last 10 years, the city still offers some of the lowest occupational costs for FDI occupiers both from a UK regional and European perspective.
When combined with a young, talented workforce, low unemployment, double digit growth sectors and a booming tourism industry, Belfast offers attractive fundamentals for investors, particularly those we work with in the commercial real estate sector.
The rates revaluation exercise of 2015 has been a catalyst for a resurgent retail sector and attracting a number of new brands to Belfast for the first time, while the new UU development has brought 18,000 students into the heart of the city.
Investment deals have totalled £164m across over 20 deals in 2016 (£400m across 43 deals in 2015), a positive performance given the mid-year uncertainty created by the EU referendum.
But it is important to build on this position. The trend for city investment has shifted, with Germany leading the way. The five leading European cities for investment are Berlin, Hamburg, Dublin, Madrid and Copenhagen. The common drivers of success are based on three factors: firstly a young population, then a growing reputation as a technology centre, and thirdly land available for development.
Belfast should fit the bill in all three of those categories. Other stand-out criteria for successful city investment includes a progressive approach to infrastructure investment and a focus on the trend of urbanisation. Growth of alternative sectors such as student accommodation within the city core help to create a vibrant city and it is encouraging to see Belfast embracing that change.
On the commercial real estate front, the lack of grade A office space is well documented, but local market dynamics also present a challenge to the development of the city – in particular the absence of a mature pre letting market.
Belfast currently has around 125,000 sq ft of available grade A space, and with a number of deals in legals, that figure may fall to 50/60,000 sq ft before year end. The market indicates there is somewhere between 750,000 and one million sq ft of demand. Estimates indicate there is a pipeline of over 2m sq ft, albeit at varying stages of planning and highly unlikely all will be delivered.
This compares to our nearest competing market, the Republic, where approximately four million sq ft is under construction across 29 projects, of which it is estimated over 40 per cent is reserved. An additional 4.8m sq ft is in planning.
The absence of a mature pre-letting market is a challenge from a financing perspective too. At Danske, we lend against cash flow and in the absence of contractual commitments, development is considered speculative and further up the risk curve.
If we assume a 4m sq ft pipeline of office space is delivered in the Belfast core, there are other factors to consider too. This would bring around 40,000 additional people into the city on a daily basis, so how would existing infrastructure cope in terms of transport, connectivity, housing, water and sewerage?
Other cities are investing, evolving and developing. Belfast needs to do the same to remain competitive, which could mean using the sort of alternative funding, public/private partnerships and shared risk that have worked so well for cities like Manchester.
The fundamentals of property investment remain robust, underlined by a strong occupational story across all sectors and a continuing arbitrage between property yield and other asset class returns.
This year has already seen investment turn from plans into delivery, with the number of cranes across the Belfast skyline increasing dramatically. Office refurbishment, new project development, student accommodation and numerous hotel developments are all contributing towards a changing and improving Belfast, more than capable of competing for investment.
The development of a long term infrastructure strategy, and successful delivery of that strategy, is key to attracting further investment in the space. Businesses want to see successful delivery, to drive improved productivity and living standards.
Closer collaboration, and consideration of alternative funding models could have a positive impact in terms of meeting the demands of both infrastructure and commercial real estate development.
:: Geoff Sharpe is head of the strategic & property team at Danske Bank
