The Cardiff Office of global real estate services firm, DTZ presented the findings of its 2014 Annual Outlook report to an audience of over 180 guests at the Cardiff City Stadium yesterday (Tuesday 18 February).
The report revealed the outlook for the regions is much brighter than in recent years with economic growth in the regions forecast to increase by 2.8% in 2014, and 3% over the medium term whilst employment is forecast to increase by 400,000 over the next two years. Job gains will be underpinned by business services, TMT and retail, offsetting the ongoing contraction of the public sector.
As a result, occupier sentiment and demand for commercial property is generally strengthening. Take-up is growing across the regions. However, availability, particularly for Grade A office and industrial space, is falling rapidly. The report estimates that there is only 1.6 years of Grade A office space left based on current take-up rates. In Cardiff, Grade A office stock is at an all time low, and following recent lettings in the city centre and Cardiff Bay availability continues to diminish with only 27,000 sq ft in the city centre and 20,000 sq ft at 3 Assembly Square, Cardiff Bay.
The breakfast event included presentations from Rhys James, Head of DTZ’s office in South Wales; Richard Yorke, UK Head of Research at DTZ; Ben Clarke, Associate Director, DTZ Research; Nick Allan, Senior Investment Director for the South West and Wales.
Rhys James reviewed all of the occupier markets and the residential land market, highlighting how each had performed in South Wales in 2013 and looking ahead to what we could expect to see in each of those sectors in 2014/15. He was in optimistic mood, suggesting there were good reasons why the market could anticipate more activity and look ahead to some exciting times in South Wales in the next 18 – 24 months after what had been a disappointing 2013.
Rhys referred in particular to Cardiff city centre, the Enterprise Zone area and the plans that Rightacres and Cardiff City Council have to redevelop the Capital Square, to the north of Cardiff Station, into Cardiff’s prime business location over the next 10 years.
He commented: “In May Rightacres will commence construction of a stunning new 135,000 sq ft office building as the first phase of development and that building will be ready for occupation in autumn 2015 . It is now vitally important that Cardiff City Council, the Welsh Government and the newly formed Cardiff Business Council pull together in an effective and joined-up manner to focus on attracting footloose inward investing companies who will bring new employment into Cardiff. Identifying and securing a significant new employer in the business / financial services sector is long overdue.”
Nationally, investor appetite for commercial property assets is increasing and volumes have risen markedly. The record yield gap between London and the regions, and between prime and secondary property, is encouraging investors to move up the risk curve. However, the window of opportunity is closing as the yield gap is forecast to narrow and regional markets becoming less undervalued.
Richard Yorke, UK Head of Research at DTZ and co-author of the report comments: “Based on its relative attractiveness, investors’ appetite for commercial real estate is very strong. This is further helped by a normalisation of the lending markets. But, investors should take advantage of current pricing quickly before interest rates rise. At the same time, prime opportunities have become less attractive. Consequently, investors need to consider secondary assets and locations more closely, which are still attractively priced. Investors need to be bold and move quickly to take advantage of this limited time opportunity.”
The growing shortage of grade A office space, combined with the regional development pipeline at an all time low, means investors are now encouraged to acquire assets for development and refurbishment. The bigger cities are best placed to respond to potential new demand. The dearth of new supply and a wave of leasing events mean that prime rents are increasing and set for further growth.
Nick Allan, Senior Investment Director for the South West and Wales added: “The turnaround in investment market has been dramatic, especially over the past 12 months. This has been driven by the huge weight of money seeking exposure to UK investment markets from domestic investors and, more significantly, a wide range of international investors. The UK is a core commercial property market, and one of the most robust in the world, but investors are also attracted to the encouraging signs of improvement within the UK economy ahead of other international markets and economies.
“The pricing pressure within London and the South East of England has forced investors towards the core six regional UK centres, including Cardiff where the recovery is anticipated to be strongest and where assets are currently undervalued. There are now excellent opportunities for strong returns from the South Wales markets with genuine rental growth and yield compression, combined with an improving environment for asset management.
“A number of recent deals in city have demonstrated the speed at which the market has corrected, including the acquisition of Hodge House for £18.87m (9.00%) by Legal & General and the strong interest shown in the ongoing sale of the Capital Shopping Park priced at £56.5m.”