When Latvia wants to emulate Cardiff, then clearly the Welsh capital is doing something right. Wanting to generate a 21st century lifestyle, authorities in the country’s capital, Riga, turned to Cardiff’s waterfront as a blueprint for a major redevelopment of the city centre.
This is just one of the many signs of renewed confidence in South Wales and one of the factors behind the growth of the investment market. According to Knight Frank, more than £125m was invested in Cardiff offices last year. This has affected prime yields, which hardened from 6.3% in 2004 to 5.8% this year.
Weight of money has undoubtedly helped drive investment. But three deals have made many London investors sit up and take notice of South Wales.
Arlington Securities’ £30.3m purchase ofSt William House on Penarth Road in Cardiff is one. Arlington bought the 134,500 sq ft office in April — its second in six months — from developer Rightacres. The sheer size of the deal propelled Cardiff into the premier league.
Arlington says it was attracted to Cardiff for its “good story for rental growth” (see box, p116). The building, let to Lloyds TSB, represents an initial yield of 6.2%.
Local agents are delighted. “The Lloyds deal takes Cardiff up to another level,” says Jonathan Miles, partner in charge of investment at Alder King in Cardiff. “It makes people inLondon look at us. They see vast improvements, such as the business parks and the millennium stadium, and it is a very good story.”
The Arlington deal came on the back of other success stories. Standard Life paid MEPC £12m for the 46,000 sq ft No 2 Callaghan Square, adding to a Welsh portfolio that already includes No 1 Callaghan Square. Purchase of the building, which is let to ING Direct and Allied Irish Bank, reflects a 6.8% yield. Standard Life also paid the Welsh Development Agency £7m for Axys House — a 45, 000 sq ft building let to Companies House.
Of course Cardiff’s story is being repeated across the region. An investors’ feeding frenzy has led to a shortage of stock. Yields have compressed to levels previously unheard of, and buyers are looking to invest in secondary and even vacant stock. But no-one really thought investors would target the valleys.
Agents seem universally surprised that Pontypool attracted a wealthy investor from Ireland, who scooped up four high street shops from Centros Miller for £4.5m. Similarly, the sale of a collection of shops in Pontypridd — the subject of a much talked about, and much delayed, regeneration — attracted a yield of 5.5%.
“The Pontypool units are all let to good covenants, such as Argos and Peacock, but with that type of investment there is a stigma attached,” says Miles. “It is not a popular location, such as Cardiff, Swansea or Newport, but owing to the lack of stock, products in these places are being traded.”
This is becoming something of a trend. Miles says institutions now seem willing to take a risk by moving away from traditional stock in traditional locations. He has been retained by a property firm to buy secondhand retail in the valley towns. “They are looking at getting prime locations within these towns on the basis that, if the economy falters, retailers will still come to solid town centres in preference to a flashy city-centre unit.”
Investors have, no doubt, been attracted by yields, which are higher in South Wales than in other parts of the country.
Indeed, according to the report Commercial property investment 2005, by agent Stephenson & Alexander, away from prime figures, yields in Wales are around 1% higher than the national average. The all-sector average for Wales was 7% over the past 12 months compared with 6.2% for major cities in other regions. But although 60% of respondents did not feel confident about the short-term performance of Welsh property, nearly three-quarters planned to increase their holdings in South Wales over the next year.
That is an anomaly Bob Croydon, partner at King Sturge, finds hard to square. Pointing to the Pontypridd purchase, he says: “It is a decent purchase, but it is in a valley town. They’ve bought anticipating that the town centre is being redeveloped. It is let to a range of good covenants in a zone A area, but there is little prospect of rental growth.” Indeed, Croydon says rents in the town over the past 10 years have gone from £40 per sq ft to just £42 per sq ft.
But the biggest shock came from the sale of H Woodley & Company butchers. The 50 properties were sold to Welsh investor Richard Morgan for more than £7m. “They were all in secondary and tertiary locations, in some pretty poor industrial mining towns. We bid a yield of 7% and we were turned down,” says Croydon. “The investor has started to restructure leases.”
The gap between grade A and secondary stock is undoubtedly narrowing. Aled Evans, head of investment at King Sturge, believes there has been a shift of 100 basis points between a multilet property and the strongest prime offices in Cardiff. So why not go that bit extra and get prime? Says Evans: “There is more pressure on rents in secondary space. It’s more likely to go from £14 per sq ft to £18 per sq ft than £18 per sq ft for prime to £22 per sq ft,” he says.
Alder King’s Miles agrees. He believes that South Wales investors are happier to sweat their assets. “Funds are aware they are not going to get a straightforward institutional return.”However, he adds a final note of caution. “I don’t think you can reduce that much more. There has to be some differentiation.”
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In April this year, Arlington Securities bought St William House in Cardiff for in excess of £30m. Seven months on, it remains the biggest deal in South Wales this year. The purchase took Arlington’s acquisition of property in Wales to more than £50m in just six months, following its £22m purchase of the city’s Hodge House. Barney Rowe, assistant fund manager at Arlington, says the attraction to Cardiff was clear: “You can still pick up good quality stock at a reasonable discount to other top provincial cities. It has historically been a place that has lacked stock and investment, but that is now being rectified”. Within 10 years, he envisages Cardiff being “very real competition”, for the UK’s top five cities, such as Manchester, Birmingham and Glasgow. If interest in the city continues, Rowe believes Cardiff could see further yield compression, which would see it move within 50 basis points of the UK’s top cities. This could see yields shift to 5.25%, fuelled by interest from property companies and funds for smaller deals with “more angles”, such as asset management or redevelopment, and from debt-driven investors seeking larger deals. But Cardiff rents trade at a discount with other UK cities. Rowe is blunt. “Given the choice, if I could buy off rents of £18 per sq ft in Cardiff or £28 per sq ft in Manchester, then I would go for Cardiff. There is more room for manoeuvre there.” But he adds: “I wouldn’t single out Cardiff, and arguably we are almost fully invested there. But never say never. If there was a good deal there, we would still go for it.” Arlington will continue to look for properties it can asset manage as well as buildings with a steady rental growth let to strong covenants. So could this mean a move to the valley towns? “Generally no, but that is driven in part by the size of the funds we run. In order to make an impact, we tend to look for large lot sizes.” |
