Chop and change The public sector is a major occupier in South Wales, and has kept the region’s economy going during the recession. But drastic cuts will change this. By Karen Day
Activity in the public sector has provided a much-needed boost to an ailing South Wales property market. But with public spending cuts inevitable, the market could be hit again in the next 12 months, as the Welsh Assembly government begins a period of harsh consolidation and rationalisation.
It will be a big hit. Traditionally, the public sector has a larger presence in the property market in South Wales than in other UK regions. Long-term economic decline in the valleys has led to the state playing a greater role in the economy as employer and landowner as well as landlord and client.
“There is a dependency on the public sector here,” says Roger Thomas, chairman of Cardiff-based Cooke & Arkwright. “You only have to look at the size and number of the buildings it occupies in Cardiff.”
The city is the capital of the Welsh government, and the public sector occupies 20% of its 9m sq ft of office space. According to King Sturge, the sector accounted for 20% of all deals in 2009, excluding voluntary and educational sectors.
In the region’s towns, the public sector’s presence is even more evident. In Merthyr Tydfil, the Welsh Assembly government has a 70,000 sq ft administrative centre. With a combination of the local college, council, health board and other WAG-funded groups, the public sector dominates the town.
“Take away the public, third sectors and housing associations, and there’s not much else in a lot of the South Wales valley towns,” says Robin Shepherd, director of Barton Willmore’s Cardiff office.
It was the public sector that kept the construction market going across Wales in the last quarter of 2009, where, according to RICS, it outperformed the rest of the UK. Its construction market survey found that 43% of chartered surveyors reported a rise in public sector workload. Only 14% reported such an increase in the private sector.
Buffers hit
The public sector has been an effective economic booster for South Wales, but it is starting to slow down. Uncertainty about the result of the general election and the potential for cuts by a new government are stalling activity.
Wales also has the double political whammy of assembly elections in 2011 and the prospect of yet more change. This comes as the private sector shows scant evidence of recovery, with very little speculative development (see p76), few financing options and limited occupational movement. Agents, developers and surveyors in the region are preparing for the unusual situation of both sectors being depressed simultaneously and for the challenges that this may bring.
“Potentially, in the next 12-18 months, we could experience a nasty cocktail of no public sector investment and a weak private sector,” says David Herbert, South Wales consultant for developer Robert Hitchens. “It would cause us significant problems in trying to bring forward developments.”
He says there has been “precious little” development activity in the past 12 months, and the company has focused more inwardly to retain tenants and maximise income levels.
For agents, a consistent and reliable stream of business is under threat. Gary Carver of Savills says the company relies on a number of public sector departments relocating each year, and any cuts are “not good news”, especially in this climate.
For Cooke & Arkwright’s Thomas, the reliance on the sector is something of a double-edged sword for the region. He says that, while the public sector has without doubt been good for the market, filling some of the void left by the private sector, it should not be there just to bolster the economy.
“Personally, it’s better to have a sustainable public sector that delivers, rather than something that just creates more jobs for the boys. We could go through a period when the private and public sectors are both depressed, but the whole idea is to get the economy back on its feet.”
Despite the political posturing, there is no clear picture yet of the potential cuts Wales faces. But, based on government spending projections, the Institute of Welsh Affairs estimates that £2.2bn could be slashed from the £15bn Welsh budget between 2011 and 2014. John Osmond, director of the IWA, says that, for the first time since the assembly was set up in 1999, it faces a real terms reduction in spending.
Boiled-down bureaucracy
“Obviously the assembly is going to do what it can, and there will be elements of efficiencies, but, when push comes to shove, it can only do so much, and it’s going to be tough,” says Osmond.
He adds that ministers have made it clear that, while the tiers of democracy in Wales will stay in place, they want to boil services down to just one or two bureaucracies.
In a nutshell, that means wide-scale consolidation, such as one council providing the country’s social services instead of 22. In terms of health, consolidation has already started to happen. The Welsh government has reduced its health authorities from 23 to seven boards, and attention has already turned to its property requirements.
In late February, DTZ was appointed to analyse the 14m sq ft of space the health boards occupy across Wales and compile an asset life register. The project has a timescale of just two to three months in which to deliver results after the election. DTZ has seconded 45 of its staff to work full time on assessing the health sector’s current and future property needs.
The Welsh Assembly has also been considering its occupational space and, according to agents, has pulled out of two 30,000 sq ft buildings in Cardiff and decanted staff back into its Cathays Park administrative base.
Rhys James, senior director at DTZ in Cardiff, says that local authorities are expected to start looking closely at their property requirements, and may opt to move into shared space with neighbouring organisations to make significant efficiency savings.
Torfaen council and Gwent police, both in outdated accommodation, have already agreed to place a requirement in the market for joint premises, where they will share offices, meeting rooms and a canteen.
Newport council is looking to rationalise its customer centres across the city, bringing all its advice, benefits and payment offices together in one building.
“There will be more of a concentration on property that’s fit for purpose,” says James. “Organisations won’t be so blinkered. They won’t be able to stay where they are or ignore their property requirements.”
Market churn
Any significant changes are likely to take some time to reach the property market, particularly as the assembly elections are being held in 2011. Nevertheless, agents remain largely optimistic and suggest that rationalisation could create market churn and potential opportunities.
Figures compiled by Cooke & Arkwright show that headline rents have stayed fairly consistent across Cardiff, Swansea and Newport since 2008, despite the recession. In Cardiff, Savills’ Gary Carver says that grade-A space is trading slowly but consistently, and he expects to see a shortage of space within 12 months, just as vacant buildings from the public sector could be expected to come onto the market.
James adds that secondhand stock still attracts “reasonable attention” due to rental differentials – £20-£21 per sq ft for grade-A compared with £14-£15 sq ft for secondhand – and an abundance of used buildings could prove attractive to a slowly recovering private sector.
After all the gloom of the past 18 months, the South Wales property market is refusing to be too shaken by potential public sector cuts. However, it is undoubtedly going to be a rough ride, even if agents say they expect to weather the storm.
