Cardiff’s UK and international profile is continuing to change dramatically with the city gearing up to embrace the next generation of industries such as artificial intelligence and cyber security, according to a leading global property consultancy.
The annual Cardiff Report produced by Knight Frank says that Cardiff’s built environment will continue to play a vital role in the city’s progress, with the new, modern space on offer serving to bring high profile occupiers to the city.
But it warns that better physical and digital connectivity is necessary if Cardiff is to reach its potential, and calls for the city centre core and the waterfront to be linked as one.
Commenting on the report, Matthew Philips, head of the Cardiff office of Knight Frank, said: “Cardiff has become a dynamic and vibrant city able to respond to the demands of modern working and lifestyle. Beacons of progress are plentiful: Central Square, Capital Quarter and St David’s Shopping Centre, and not forgetting Cardiff’s Principality Stadium, are all examples of the ambition of Cardiff.
“Now the city must promote its attributes to the industries of tomorrow and dispel any perception of being a low cost option for back office functions.”
The Cardiff Report, which was presented to more than 60 of the city’s leading property professionals, said that Cardiff continued to offer opportunity for property investors in all asset classes. The city was high on many global investors’ shopping lists due to its growing attraction to large and international businesses, which led to exciting opportunities and, potentially, returns ahead of the market average. All asset classes were displaying areas of opportunity, from the call of responding to ‘the last mile’ conundrum for industrials, to addressing the changing preferences of residential use.
Matt Phillips commented: “Cardiff is high on many global investors’ shopping lists because of its ever-growing profile and quality of life offered. Cardiff regularly ranks as one of the top places to live, with a wonderful history, first-class higher education facilities, and a burgeoning tourist industry and now it is rapidly becoming a significant technology, media and telecommunications (TMT) hub.
“Rental growth and tenant demand are anticipated to continue to grow across the city. This will improve investment performance, meaning acquisitions should be evaluated by the strength of the potential rental growth performance of the asset being purchased, rather than the level of ‘day one’ return that they provide to an investor. These initial yields only tell part of the story – purchasers need to understand the city’s future vision and the medium to long-term employment objectives.”
The Report claims investor opportunity to date had mainly derived via new development, with Aviva Investors’ sale of Cardiff Waterside to American investor Global Mutual for £84.5 million in 2018 proving a good example. The scheme consisted of 400,000 sq ft of office space across seven buildings and crucially, two development sites with planning already in place for around 360,000 sq ft of office space.
In addition, L&G had been an integral part of the development of Central Square with the final phase now agreed, and will deliver a new bus station, 318 Build to Rent (BTR) apartments, and 100,000 sq ft of Grade A office space. L&G had also agreed to forward fund the Department of Work and Pensions’ new HQ in Treforest to the tune of £52 million at a yield of 4%.
Importantly, Cardiff’s employment base had strengthened, with leading companies such as Admiral, Deloitte, Legal & General (L&G) and Hugh James all major residents in the city. This strength of covenant had proved important. LaSalle Investment Management’s purchase of the Admiral HQ for £86.7 million in 2018 was demonstrative, with the deal representing a yield of 4.21%. The extremely low yield was consistent with pricing paid in central London.
According to the Cardiff Report better transport connectivity could further transform the city, enabling Cardiff to able to grow demographically and economically as new business communities developed. It said that extending the core and linking the waterfront area should be a priority and would mean that development opportunities would be enabled. It added that connectivity included digital and fibre optic capability, not just the physical public transport nature of connectivity.
Matt Phillips commented: “There is a need for the city core to extend to accommodate growth, and it is time for the city and its waterfront to be one.”
Looking ahead the report said that Cardiff was experiencing clustering from high growth sectors, with occupiers from technology, fintech, the creative industries, life sciences and advanced manufacturing gaining prominence. Specifically, technology occupiers represented close to 15 per cent of offices demand in 2018.
Challenger banks Starling and Monzo had taken space in Cardiff in 2019, along with specialist insurance software provider Sapiens and financial technology provider Delio. “Employment growth from the sector is projected to be 15 per cent over the next ten years. Suitable space is in short supply to support growth, which presents an opportunity for dedicated development and funding. Investor interest of course, will depend on risk appetite given the absence of proven covenant profiles,” added Matt Phillips.
“Cardiff has been identified as one of the 13 fastest growing tech clusters, surpassing £1 billion (£1.07bn) according to Tech Nation. With a pioneering start-up community, the most dominant stage for tech companies in the city, it hosts more than 90 digital firms that have been established in the past three years. Consequently, with a growing tech cluster, the city has generated employment opportunities, with 45,000 employed in digital tech.”
The report also states that capital investment into alternative property sectors has been rising as investors search for yield. Cardiff’s large student population and their need for housing had attracted investment, with significant upgrades and additions to student housing stock over the past 10 years.
In July Unite, the UK’s largest provider of purpose-built student accommodation (PBSA), proposed the acquisition of rival student housing provider Liberty Living for £1.4 billion. This deal was expected to close in Q4 2019, with assets in Cardiff worth approximately £253 million. This made it the largest investment transaction of 2019.
With existing housing stock dominated by terraced houses and flats representing less than 30 per cent – compared to 37 per cent in Bristol and Manchester and 32 per cent in Birmingham – the opportunity existed to create centrally-located apartments to serve Cardiff’s large population of young professionals.
The opportunity to tap into the growing Build to Rent (BTR) market had been seized upon by L&G with £400 million invested into Cardiff’s Central Square regeneration project, which would surely act as a catalyst for others. The report concluded a high quality BTR pipeline had now been established in Cardiff, prospecting on rising graduate retention rates and young professionals who would support an influx of city centre living.