Out of control For Welsh investors, things are accelerating at an alarming rate, and gazumping is making a reappearance. Nadia Elghamry reports
Beware:the bubble is back. And, like a monster from a 1950s horror movie, this one is terrorising the gentle folk of the Welshinvestment community.
Local agents breathed a sign of relief in late summeras the investment market started to turnaround. But, as the third quarter became thefourth, things started to accelerate, and even spin out of control. The three phrases thatshould strike terror into any market are back: weight of money, best bids and, worst of all, gazumping.
Things really began to get hotlast month.In the third week of October,Dwr Cymru Welsh Water signed the largest deal in the Cardiff offices market since Eversheds announced its move to Callaghan Square in 2001. Welsh Water agreed to buy HSBC Specialist Investment UK Active Property Fund’s 75,000 sq ftLinea building in St Mellons Business Park, Cardiff, for its own occupation. The price is unknown, but commentators believe that a 20% reduction on the £15m price tag mayhave been achieved.
In thesame week, just a few doors down from the newly opened St David’s 2 centre,the owners of the Waterstone’s bookstore received a full asking priceoffer for the premises,equivalent to a yield of 6.5%, and went to best bids. Agent Savills says that it is currently in solicitors’ hands at a figure “significantly better than we were quoting”. A handful of bids are believed to have been received, and local property players believe that the building will eventually go for just under £7m – a yield of 6.25%.
Things arecertainly heating up. Nobody knows this better than Richard Hayward, chief executive of Hawtin, a South Wales-based investor and developer. He was recently gazumped on a deal, and says: “I’m considering properties that I was looking at buying at the beginning of this year, when they were 12%.They are now probably 8% and possibly under. It’s a massive leap.”
Things have becomeso hot that Hayward is tentatively considering a complete U-turn in his investment strategy. “I was a net purchaser of property but I think I should be a net seller,” he says,”as this market does seem to be frothing a bit.”
Hard work
Hayward says that he has worked hard to accrue property, having spent about £6m in Wales and £13m overall in the UK. Over the course of the next year, he would like to try to spend £50m, but he has a dilemma.
“We’ve never sold property,” he says.”We’ve always held everything, and that has cost us a lot over the past few years. But then I think, you never die from making a profit. The market is strong now and I could take my profit.”
It is hard work for agents,too, not least in keeping abreast of exactly how quickly yields are moving.
“It’s got ferocious for prime stock,” says Anthony Phillips, head of BNP Paribas RE’s Cardiff office. “Over the boom years, prime and secondary got closer and closer together, like magnets, and now it is as if someone has turned the poles around and they are bouncing away from each other.”
Rising prices will help to flush buyers out of the woodwork, and Phillips believes that, for every Hayward unsure whether to sell, there will be others keen to get their hands on cash. “If you’ve got product at £6m and you get an offer at £8m, you might ride it out and wait for the next revaluation,” he says.”But then, you’re not going to get the cash,and there are a number of funds out there filling their boots.”
At present, no one seems to be sure whether this is a correction after prime property was downvalued too harshly and too quickly when the downturn hit, or if the weight of money is artificially inflating prices. Agents say that the test will be when debt-buyers return. For that to happen,banks must begin lending again and borrowers borrowing (see below).
Whether there will be anything to buy is another matter. Peter Graham, managing director at Stephenson Alexander, says that there is a severe lack of stock.”In September,”he says, “I saw a shift of 0.5% in yields.Now, a month later, it is 1% and in some places 2%.It is hard to see how that can be – but that’s the situation.”
Headds: “I sincerely hope this is a short-term hiatus. People need to return to a proper consideration of a property and all its merits and its demerits.”
Pointing to Cardiff’s Magellan Court,bought a few years ago by Pearl Assurance butnow back on the market, Graham says: “It’s now in for best bids. It’s quite a nice building, with medium-security income, and it’s gone for 8%.I don’t think the owners expected better than 9%.”
Retail funds are driving prices quite aggressively, because property is seen as good value. But there comes a point, says Dan Griffiths, specialist property investment consultant at EJ Hales, when the rebound is high enough forit to be a good buy no longer. “For Wales,” he says,”that is probably at 5.5% for high-street retail. The other side is the danger that the investment market is splitting away from the underlying occupier market.”
What to buy
While foodstore retail and industrial yields top the yield tables, it is the dunce of the class that is generating the most interest among agents. Niche investment agency Stephenson Alexander says that offices are achieving yields of 8-9% – though these figures were compiled before the recent downward movement.
Graham says: “That does seem a big discount, as other sectors haven’t come down as much. I think we’ll see 7.5% if the stock comes up.”
Plummeting take-up has not helped. On average, 500,000 sq ft a year is signed up in Cardiff. So far this year, according to BNP PRE, take-up has struggled to reach the 200,000 sq ft mark, and most believe it will end the year just above that figure. Many are pinning their hopes on the BBC signing at Igloo, which would double this figure.
EJ Hales investment consultant Dan Griffiths says that, if he were spending his own money, he would put it into Cardiff offices. “I think there’s a really good opportunity as there is hardly any stock left.”
Banks – return of the debt?
The banks are tentatively back. And one that is talking about being back is Nationwide, but it is treading very carefully. Alun Morgan, senior lending manager at property finance firm Nationwide Commercial in Cardiff, says that it remains committed to supporting the property finance sector. It was involved in financing the St Davids 2 centre. He says it is “one of a small number of lenders still open for business and proud of the fact”.
That said, he adds that, like most lenders, it has tightened its lending criteria. Add to that the scarcity of property on the market in South Wales, and the fact that some investors do not have the equity to satisfy the loan-to-value ratios now required – which are edging towards 40% equity – and he says: “As a consequence, Nationwide is seeing only a limited number of funding opportunities.”
The possibility of a return to the good or plain mad times of 2006 and 2007 are “a long way off”, Morgan believes. “I can’t see the same number of lenders returning. Some may not return at all.”
Instead, Morgan is pinning his hopes on a gradual improvement over a three-year period.
