Scavengers closing in: With funds cutting portfolio valuations by 10-15%, bargain hunters are moving in to the Welsh market
Deflated and dejected, the market in South Wales, as elsewhere in the UK, has taken a hit in recent months. Things have hardly got off to a roaring start in 2008, and the mood among agents is flat, with many bemoaning the lack of activity.
Predictably, it is in investment where the largest losses have been registered. Anthony Phillips, head of offices and director of investment at Atisreal in Cardiff, says funds have stepped back from the market.
Most have revalued and seen10-15% wiped off portfolios. “They wanted the pain over with,” he says. “They didn’t want it chipping away at them bit by bit each quarter.”
Phillips tempers this by adding that the losses being nursed are “all on paper”, and the falls need to be put into context. “If you came in two years ago,” he says, “the fall is nothing compared with the gains you’ve already made. If you got in six months ago, that’s a big chunk, and some of the funds are hurting.”
However, wherever there are casualties, the scavengers are close behind. Phillips adds: “The property companies are back, and I’m speaking to people I haven’t spoken to in three years.” As an example, he points to an industrial unit in Newport. “We tried to buy it last year, and it was £9m,” he says. “Now it is £7.5m, and the vultures are circling.”
Not blooming
The economic outlook, while far from catastrophic, is not blooming either. Oxford Economics predicts that the rate of growth of employment in finance and business services – and hence office demand – is set to drop again this year off a peak of 10% in 2005.
OE expects that this rate of growth in the Welsh market will not pick up until 2010. This is against predicted steady growth in both the South West and the UK as a whole over the next two years.
Atisreal says that rental growth will struggle at 0.5% this year, followed by zero growth in 2009. This compares with steady growth of almost 2% pa in the South West to 2012.
In Cardiff, a late flurry of deals in December saw office take-up recover from its disastrous position at the half-year point. According to DTZ, 2007 take-up reached 550,000 sq ft, only marginally down on 2006’sfive-year high of 560,000 sq ft.
“This surprised many agents, particularly as the figure at half-year was down 20% on 2006,” says Gary Carver at DTZ. He says that figures were boosted by a number of “reasonably sizeable deals,” rather than one or two.
A string of deals in the Welsh capital has also proved that the record £20 per sq ft milestone reached last year was more than a flash in the pan. Rightacres and MEPC secured a second letting at Callaghan Square to publishing house GDS Publishing and the Commission for Equality and Human Rights. Agents are already setting their sights on £21 per sq ft being achieved before the end of the year, again in Callaghan Square.
In Newport, the building blocks – which Robert Carew-Chaston, managing director of local agent Hutchings & Thomas, says seem to have taken “an age” to assemble – are now in place. These include planning consent for Modus’s £90m City Spires scheme, which will provide 89,000 sq ft of office space and a similar amount of retail and, at the other end of the city, the developer’s £200m retail-led scheme, Friars Walk.
Yet, with Welsh Investment Strategic Partnership’s 48,500 sq ft Orb under construction, andtwo-thirds of the 30,000 sq ft Usk House empty, Rhiddian Morris, at Knight Frank’s Cardiff offices department, believes that construction of the Spires scheme may have to wait until part of the office element has been prelet.
The announcement of a quoting rent for Orb will be key. “The success of Newport’s office market has, to date, been centred on junction 28 of the M4,” says Morris. “The true test will be if it can attract larger office occupiers. The city-centre office market should be commanding similar, if not better, headline rents than out of town.”
Relief road
Even the out-of-town market has a few bumps to overcome. Public sector relocations have picked up space, but agents are desperate to receive the go-ahead for the proposed M4 southern relief road.
Carew-Chaston says: “It would take away problems associated with the M4, and just the decision to go ahead would inject a healthy dose of optimism into the market.” Construction is expected to begin in 2009, subject to the resolution of issues from groups opposed to the road.
Morris predicts that headline office rents in Swansea will increase this year to £14.50 per sq ft, led by SA1 Swansea Waterfront. This is quite a leap from the £12.75 per sq ft achieved on a prelet to Admiral Insurance at SA1 in December 2005. Little has tested the market since.
Lambert Smith Hampton backs up Morris’s view, predicting that Swansea will be one of nine leading UK markets this year. It is predicting 5.9% growth in the city’s demand for offices by the end of 2008, although it believes rents will have achieved a more modest £13.50 per sq ft.
Morris says that the main threat to Swansea’s market is still its limited development pipeline, with nothing coming out of the ground in 2009. “This will have a significant knock-on effect, and will lead to poor take-up levels and limited product to attract inward investment,” he says.
This prognosis is, however, reliant on the letting of: WISP’s 42,000 sq ft Ellipse building when it is completed this spring the 40,000 sq ft Langdon House in SA1, which is scheduled for completion in July and Kenmore’s 100,000 sq ft Crucible Park at Swansea Vale, set for completion by the end of the year.
Meanwhile, industrial is set for a major blow, with the end of empty rates relief next month. According to the RICS, levying rates on empty industrial buildings after six months will, in Wales, add costs equal to 40% of rents (see p150).
A string of closures last year, including Burberry and MFI, have brought more than 1.5m sq ft of space back to the market, says Stephen Myers, senior surveyor at Knight Frank’s industrial and logistics department. He points to similar closures in 2005 and 2006. “Sony, Christie Tyler, Nippon Glass, Dyer Plastics, Wrigley and Hyper Value closed their local facilities,” he says. “However, the majority of these properties were acquired by local investors, refurbished and relet.”
