Hope springs Despite the recession, a new headline rent for Cardiff has been set, and confirmed with subsequent deals. But are things quite as they first appear? By Stacey Meadwell
Having shocked the UK office market by achieving a new headline rental in the middle of a recession, the Cardiff market looked to the next new building in the city to see if the trend would continue.
The £21 per sq ft new headline rental was brokered over the summer at 5 Callaghan Square in the city centre, when B3 Burgess Architects took 4,300 sq ft on a 15-year lease with 25 months rent-free. And then Deloitte & Touche took a 15-year lease, also at £21 per sq ft with 27 months rent-free, in the same building.
So when M&A Solicitors signed for 10,200 sq ft at Aviva Investors 3 Assembly Square – Cardiff’s first BREEAM excellent building, which was completed in July – agents hoped it would breach the headline record. It did not, but it did cement the £21 per sq ft figure.
The deal, however, was completed at a price that reveals more about the state of the Welsh capital’s office market than the figure itself.
The terms of the M&A deal have not been officially revealed but are thought to have included a 23-month rent-free period, with the equivalent of 10-13 months’ rent given as a lump sum to offset capital costs. If these are the terms, then the deal would equate to a net rent of less than £16 per sq ft.
Knight Frank, which is joint letting agent at 3 Assembly Square with Cooke & Arkwright, will not comment.
The M&A deal provides food for thought in a market that, up to the end of Q3, had totted up 225,000 sq ft of lettings against a total of 425,000 sq ft in 2008 (see Market at a Glance). Agents are predicting annual take-up of between 300,000 sq ft and 350,000 sq ft this year, in part due to a flurry of deals that could be completed in the final quarter.
Dwr Cymru Welsh Water has already helped by signing the biggest deal in the city since 2001, buying the 75,000 sq ft Linea House at St Mellons Business Park.
Deals under offer include 54,000 sq ft at Capital Link for Peacocks and 9,000 sq ft at 5 Callaghan Square for Network Rail.
Alex Easton, head of office agency at DTZ, says: “There have been a good few deals that have happened which have bolstered take-up, and there is easily another 100,000 sq ft that could be added to this year’s total.”
Most agents believe that the market is bottoming out, and that next year’s take-up figures will feature churn from existing occupiers rather than any big lettings to new arrivals.
Fierce competition
John James, director at Fletcher Morgan, points to the 125,000 sq ft Fitzalan Court where, he says, there are a lot of leases coming up next year. He adds that rival landlords will be competing fiercely to entice occupiers into newer space.
Grade A supply accounts for 250,000 sq ft of the overall 1.25m sq ft of space available – a figure that includes business park space. King Sturge’s Cardiff office joint managing partner, Huw Thomas, reckons there is a year’s supply of grade A stock left.
Since there is no space under development, supply is set to dry up. Easton says the resulting market pressures will mean that incentives will start to reduce towards the latter half of next year and into early 2011.
The problem now is future supply. DTZ’s Rhys James explains: “Development activity is unlikely due to viability. Deals being done at the moment are weighted in tenants’ favour, there is a thin supply of substantial demand coming through and, quite frankly, it’s still difficult getting bank funding.”
There are rumours that one scheme – local developer JR Smart’s mixed-use project on Tyndall Street – could start on site next year with an office building of 15,000-25,000 sq ft. However, the developer announced its first-ever loss last week, so the speculation may be wishful thinking on the part of agents. JR Smart could not be reached for comment.
Agents believe Cardiff’s office market is better placed than those in a lot of cities to ride out the recession but, as Thomas comments: “It’s like a comet with a long tail – recovery is going to be a long, drawn-out process because of the debt, pressure on public spending and unemployment.”
| Cardiff agents league tableDTZ stays in pole position, but with far less space than last year | ||
| Agent | Total space (sq ft) | No deals |
| DTZ | 137,830 | 33 |
| Knight Frank | 101,380 | 15 |
| Fletcher Morgan Chartered Surveyors | 84,950 | 17 |
| King Sturge | 67,380 | 16 |
| Cooke & Arkwright | 43,610 | 10 |
| Emanuel Jones | 35,880 | 12 |
| Savills | 23,290 | 2 |
| Lambert Smith Hampton | 20,070 | 6 |
| Alder King Property Consultants | 18,100 | 6 |
| Michael Graham Young | 14,040 | 14 |
Source: EGi Deals DatabaseThe table covers Cardiff – postcodes CF3, CF5, CF10, CF11, CF14, CF15, CF23 and CF24 – for the period 1 July 2008 to 30 June 2009. Both sales and lettings are included (but not investment sales). The table refers to agents acting for the lessor/vendor, not the lessee/purchaser. Joint agency deals are related to both agents
Savills’ entrance into the Cardiff market at the beginning of the year has already left its mark in the office agents league table for the city.
Gary Carver, who left DTZ to head Savills’ office and beef up its presence in the city, has steered the company into seventh place, notching up 23,290 sq ft of disposals in a table that, overall, tells a sorry tale of tough market conditions.
Carver’s former firm, DTZ, maintained the top spot, but with nearly 100,000 sq ft less than last year, and fewer deals. Indeed, the number of qualifying deals in the table was down by nearly 40% on last year’s total.
Aside from DTZ, the top of the table remains stable, with Knight Frank and Fletcher Morgan taking second and third spots respectively.
King Sturge has regained some of the ground it lost last year when it fell from second to sixth place. It has now moved up two places to take fourth place. One to watch for next year, maybe?
Market at a glance
Office rents have risen from £20 per sq ft to £21 per sq ft in 2009, achieved on two deals
Rent-free packages of up to 30 months on a 10-year term bring net effective rents down to around £16 per sq ft
Take-up is expected to reach 300,000-350,000 sq ft this year, compared with 425,000 sq ft in 2008
Availability in town and out of town is 1.25m sq ft, of which 250,000 sq ft is grade A
No new offices are being developed
Prime retail rents on Queen Street were £320 per sq ft zone A last year. There have been no open market lettings this year, but it is generally accepted that rents have dropped
Sources: Knight Frank, Savills, Cooke & Arkwright
St David’s 2 improves the city’s retail ranking
Eight years is a relatively short period of time in development terms, at least for a project the size of St David’s 2.
Plans for a £675m extension, which would take the centre’s total size up to 1.4m sq ft, were first unveiled in September 2001. Last month, the doors opened on a scheme that was 70% let by floorspace – quite a feat when much of the letting period has been during the worst recession for 30 years.
According to Jonathan de Mello, director at retail analyst Experian, the John Lewis-anchored scheme will catapult the city up its retail rankings from just outside the top 10 to number five, although it will settle in at eighth place once other retail schemes in the UK come to fruition in the next three to five years.
Justin Taylor of Cushman & Wakefield, which is joint letting agent with EJ Hales and Lunson Mitchenall, says there were 60 stores ready for customers on the opening day, and he expects a further 30 to be trading in the run-up to Christmas. “Certainly by Easter we will be substantially let, and the vast majority of space will be open and trading,” he says.
Taylor’s confidence extends to the sort of deals he will be able to achieve on future lettings. He says: “In The Hayes part of the scheme, there are only a few units left, the catering is all let and we’ve got some gaps on the upper level. When you get to that level, you get some competition, so it enables you to get some better terms.”
Eyes will inevitably now turn to how the city centre’s existing retail pitches adjust.
Huw Thomas of Cook & Arkwright says: “The Capitol shopping centre has been the stronger of the two ends of Queen Street. However, that will shift now because of the opening of St David’s 2.”
But David Holmes, asset manager for Moorfields Group, which owns Capitol Shopping, says St David’s 2 will benefit the city centre as a whole by attracting more shoppers.
“Queen Street will always remain the prime spot within Cardiff,” he says. “You only need to look at the sort of retailers that are on the street, and John Lewis is a very good addition. Queen Street has got two major transport hubs – Queen Street station and the Churchill Way bus transport hub – so I feel we are very well placed to benefit from the increase in footfall.”
Capitol Shopping has three shops vacant following administrations, plus parts of the former Zavvi shop, which has been broken up.
Although Holmes admits that market conditions are such that you have to be “flexible and dynamic in signing up retailers”, he is confident that at least two of the units will be let by Christmas.
