Plot thickens: As the residential market grinds to a halt, developers are changing their plans and building more offices and hotels. Nadia Elghamry reports.
After years of playing the ugly sister to residential, commercial development seems at last to be blossoming into Cardiff’s Cinderella.
The pendulum began to swing back over the summer after several developers turned their backs on residential plans in the Welsh capital and applied for change of use to offices and hotels.
Nobody is claiming that commercial development could rescue a property market beset with funding and occupier problems but, with planning permission granted for more than 9,500 flats in the city, it is understandable that several high-profile developers are reconsidering their plans.
For example, Cardiff-based developer JR Smart announced in April that it would submit plans for offices, a hotel and units for creative professionals as part of a masterplan for its mixed-use scheme at Tyndall Road (see box, p69). The developer had bought the 7-acre site from Praedia Investments in March with outline planning consent for, among other elements, 675 homes.
This was quickly followed by comments in the local press from Chris Hamilton, managing director of the proposed 33-storey Bay Pointe development in the Bay area. Plans include 9,500 flats, but Hamilton said he was “treading carefully” and that “the high-rise development would not be built in the short term if it risked undermining the city’s property market”.
The Royal Institution of Chartered Surveyors Wales is clearly worried. It has been touring the region with its Only Fools Rush In roadshow, advising developers, agents and valuers about the pitfalls of buying land in the current climate.
By May, a RICS survey showed that the majority of surveyors were reporting a 2-5% drop in residential prices in Wales during the previous three months. The number reporting a rise in prices fell by two-thirds in the same period. New buyer enquiries had fallen for the 10th consecutive month, as had new instructions.
Those about to put stock on the market, such as St David’s Partnerships with its Hayes Apartments at the St David’s 2 development, report “a lot of interest” for the initial batch of 20 flats made available for off-plan sales earlier this year, but at that time it sold only five, and there are another 299 in the total development.
The bad news for residential developers is undoubtedly good news for commercial ones, which have struggled to compete with housebuilders for land. But are they in a position to take advantage of this?
John Williams, senior manager corporate relationship banking at the Co-operative Bank in South Wales, says there is general caution in the market, and that certain types of business – predictably residential development – are suffering.
On the commercial side, Williams says that the bank has not changed its lending criteria, but adds: “We are looking to work with existing customers rather than look for new opportunities. And we are keeping one eye on the property sector and one eye on a slip into recession. That is something we are very aware of.”
He adds: “We are fortunate that we don’t have to go to the wholesale market to raise money. We’ve been conservative, and that has stood us in good stead. We’re continuing to talk to our customers and trying to understand their strategies and support new activity in property development, but we would not be attracted to anything speculative. We want decent covenant strength and an element of prelet or presale.”
On the corporate occupier side, Williams says many investment decisions are being postponed.
“There is not a lot of expansion and, generally, most are taking measures to cut costs and reduce borrowing. Investment plans are being postponed until the economic landscape is clearer,” he says. “There is a view that we haven’t bottomed out yet, and there is less confidence in the market now than six months ago. It will get worse before it gets better.”
Williams adds that there is some pent-up demand, but says: “Even once confidence is restored, it has waned to such an extent that there will be a reluctance to invest, even if companies have the resources.”
However, he tempers this bleak forecast, saying: “The banking industry is in a state of change, and it is focusing on managing balance sheets rather than increasing market share. But the only way banks and building societies make money is to lend money and, at some point, there will be a need for the financial services to generate profits, and the availability of credit will come back.”
Developers with their own money are, understandably, faring better.
Morley is committed to building out its 3 Assembly Square, and says it has consent for another 550,000 sq ft of office space. “Despite the economic pressures, Morley is committed to the realisation of a masterplan to shape the future of the waterfront and the city,” says the company.
However, consent for the 60,000 sq ft 3 Assembly Square was granted in August 2006, before the credit crunch had been invented.
Alex Smart, managing director at JR Smart, is coy about how much the company paid for Tyndall Street. But he says: “We bought the site with no intention of going ahead with residential. We were always going to develop it as a commercial site because residential was falling away.
“Previously, the resi boys would have been able to outbid us. This time, we did same as everyone else – put it into our model. Let’s just say we are pleased with the price we got it for.”
Smart says he has been surprised by the market. “I thought there would have been more opportunities coming through but, realistically, we haven’t seen any bargains,” he says. “But that is probably because the Cardiff market wasn’t ever overdeveloped, so it is still in good shape.”
Gary Carver, associate director at DTZ, believes that more developers will look to change from residential consents to commercial.
“Certainly, with multi-use schemes, where there is residential, they are going to have to rethink their strategy. Commercial developers are getting more of a look-in.”
The case for development generally is getting harder. Carver points to the credit crunch as well as the empty rates legislation.
“How many more nails can they put in the coffin to stop speculative development?” he asks. “Developers are going to be very wary about commencing schemes. The problem is that, if occupiers tick along at the present rate, and in 12-18 months developers are still reticent to start schemes, then we could end up with a lack of good-quality office space.”
As a result, he believes that Callaghan Square, for which DTZ is the agent, could reach the £21 per sq ft level – despite rents in the city having taken seven years to budge from £18.50 per sq ft to £20 per sq ft – and even then, only by splitting up floors and letting smaller suites.
Yet this is more than just agent hubris. The office market seemed to gain strength last month when MEPC and Rightacres secured a 70,000 sq ft prelet to British Gas/Centrica at Callaghan Square. Paying £20 per sq ft, it is the largest office letting in Wales this year. Rightacres bought the utility company’s headquarters at Helmott House in Churchill Way for £12m, although sources close to the deal say this was not a sweetener.
Cardiff’s property industry is keenly watching Rightacres’ plans for the building, and suggests a budget hotel is interested in at least part of it.
The Centrica deal is a welcome addition to take-up figures. By March, Cardiff office take-up was slightly behind the 10-year average, says Huw Thomas, joint managing partner at King Sturge. Once the Centrica deal is included, figures for the half-year should be around 200,000-225,000 sq ft, which Thomas says is acceptable.
Cautious decisions
“We haven’t seen the plummeting depths that the market in some parts of the country have reached, and a lot of the growth has been indigenous as opposed to years ago, when there was lots of inward investment. The volumes of enquiries are down, but the quality is strong,” says Thomas.
“However, decisions and, more importantly, commitments are taking longer. What took three months a year ago is taking six now.”
Incentives have also stabilised, says Thomas, but he adds: “Given the onset of empty rates and the general malaise, landlords may be more enthusiastic to sharpen their pencils and do a deal.”
Thomas believes that JR Smart’s decision may be a prudent one in the medium term. “Pure offices may have been overkill, but there are going to be other uses, and Cardiff needs its own Brindleyplace,” he says. “The developer had no choice. The residential market has not just peaked, but it has come to a shuddering halt in terms of the high end.”
Thomas says that a wholesale reversal in strategy among residential developers is unlikely, but adds: “The areas most at risk are those in the fringe bay locations – and by that, I don’t mean overlooking the bay – and there, it is probably not appropriate to transfer consent back to offices.”
So commercial may be blossoming into Cardiff’s Cinderella, but it seems that developers are treading cautiously lest their glittering proposals end up looking like a pumpkin.
New schemes make Tyndall Street central
As the last slab of developable land close to the city centre, the 7-acre Tyndall Street site is a “real gem”, according to its owner, JR Smart.
“Four years ago, this would not have been considered to be city-centre but now, with the arrival of Callaghan Square and St David’s 2, we are smack bang in the middle of prime,” says managing director Alex Smart.
The developer is working up its masterplan for the scheme, which will accommodate 750,000 sq ft of developable space split between offices, a “small amount” of residential and a “three-and-a-half-star” hotel, for which four operators are bidding.
It is also deciding whether to go ahead with the city’s first tower, for which it has outline consent.
Smart says city planners have been supportive of plans, but adds: “They are cautious of not over-egging tall buildings, as has happened in other cities.”
Once planning has been granted, which Smart hopes will coincide with the present occupiers vacating the property in December, the developer will go ahead with demolition and roads infrastructure.
Smart says it will be watching the progress of rival schemes – including its own 60,000 sq ft Capital Link scheme at the gateway to Cardiff Bay – before it decides how much office space to develop at Tyndall Street, “but it will definitely be at least 50,000 sq ft”.
Rents at Capital Link are well behind the £20 per sq ft headline set at Callaghan Square, at a modest £16.50 sq ft. Smart says he expects rents at Tyndall Street to be nearer those at Callaghan Square.
With the massive St David’s 2 development emerging a short distance from Tyndall Street, some local agents question whether creating a mix of uses will prove a headache for JR Smart.
But Smart says: “St David’s 2 is a big plus. We have occupiers coming to us because we back onto St David’s 2, and because we are close to the university and the cinema – and because we are four minutes’ walk from John Lewis.”
