Almost nobody doubts the good intentions of the Welsh government. Its efforts to kick the sluggish Cardiff office market back into life have won widespread applause (see side panel, p84).
But behind the smiles lies anxiety. Many in the Cardiff office market worry that the government’s intervention could accidentally dampen down rental growth and snuff out the prospect of more private-sector speculative development.
The anxiety is heightened because take-up statistics seem to suggest demand for new grade-A space is modest, while the Welsh government’s desire to fill its schemes (and so have a good story to tell) is probably strong. This combination has left some property people worried that the government might undercut on rents to win headline-grabbing deals.
Simultaneously, at least one big occupier – Legal & General – has put a requirement of up to 150,000 sq ft on ice. The talk among agents is that L&G suspects it will be in a stronger negotiating position when there is more choice of stock available.
With Cardiff office rents already at a £10 per sq ft discount to deadly rival Bristol – making development appraisals finely balanced – this is just the kind of news city office agents don’t want to hear.
Gary Carver, director at Savills, is one of those with concerns. “There is a danger that we’re seeing too much development too quickly,” he says. “There could be 310,000 sq ft under construction, which is a lot if you compare it to known requirements. Even if Legal & General came back into the market, we’d be a long way short of that figure.”
Attention is focusing on requirements such as that of accountant Deloitte, which is looking for 60,000 sq ft and is said to be “being pushed by the government“ to take space at Callaghan Square. DTZ, which is advising, declined to comment.
Carver adds: “If the government subsidised Deloitte at Callaghan Square, other developers might feel that was an unfair advantage.”
Nigel Roberts understands the anxiety. Over the last few decades, he has developed 400,000 sq ft of office space at St Mellons. Today he is chairman of the newly formed Cardiff Business Council, a body designed to bring the property sector, the Welsh government and Cardiff city council together in happy union.
Roberts is sympathetic both to the government and the worriers. “The Welsh government started thinking about its intervention when bank funding for development was impossible, and Cardiff office rents were too low for development appraisals to stack up,” he says. “It saw there wasn’t enough grade A office stock to allow Cardiff to capture mobile requirements.
“And it’s paid off. The BBC is now anchor tenant at Central Square, while JR Smart is on site with the Capital Quarter and another 100,000 sq ft has been triggered from Rightacres next to the BBC. But we want to see office rents go up – you only have to do the maths to see that they need to. There is already some evidence of rental growth, and there is also evidence that having new speculative office space is allowing Cardiff to win new occupiers.”
Roberts points to the arrival of Alert Logic, a Texas-based company lured to Cardiff rather than a potential relocation to Belfast. It has signed up for 12,000 sq ft at the Capital Quarter.
“The Alert relocation was the real thing, and we need more of it,” says Roberts. “We’re talking to 30 or more genuinely hot relocation options. But we can’t have the perception that the Welsh government is subsidising the market. We can’t have lenders saying values are being propped up by the government – and I think the government gets that. What we need to show how wrong that perception would be is private-sector speculative development.“
Matt Phillips, head of Knight Frank in Cardiff, is an adviser at JR Smart’s Capital Quarter, and to Legal & General. He points to evidence that suggests the Welsh government’s intervention is not destabilising the market. But he isn’t calling for more government intervention – at least, he doesn’t think he is.
“The only evidence we have of the effect of Welsh government intervention on market rents is from No 1 Capital Quarter, and we’ve seen deals of £18.95 per sq ft and rent-free periods inside the market norm,” he says. “These deals are no different from the ones the private sector would have agreed.
“But I take the point about the risk of market distortion. If the Welsh government builds out at Callaghan Square, then this is one of the things it has got to be very careful about, so that it builds on headline rents.”
Although Phillips thinks the Welsh government got the decision to buy No 1 Capital Quarter right – it is now 75% let – he isn’t so sure he wants to see it build at Callaghan Square.
“I’m in two minds about this,” he says. “I generally prefer to see the private sector deliver, not the public sector. On the one hand, we might need more grade-A stock soon, but on the other, the government must not undercut the market and erode rentals, in the process damaging what is an improving office market for the sake of short-term gains.”
In a statement to Estates Gazette, the Welsh government says: “Cardiff needs a readily available supply of grade-A offices in order to continue to attract high-quality jobs and investment. While some new private-sector developments have started, there is still a shortage of offices needed to meet demand. This development will close the gap between supply and demand to attract investment and jobs to Cardiff.”
Some interpret this statement as a sign that the government intends to push on with Callaghan Square rapidly, despite anxieties. Others see no obvious new message.
Area of worry
Owen Young, head of agency at Alder King, says: “Cardiff needed public-sector development. I don’t think the aim was to interfere, but to stimulate. I think the government is very conscious of how it lets these new buildings, and at what rents, but that is the area of worry.”
Young says fears about oversupply are overstated. “If we’d had more grade-A office space, it would have let,” he says. “Major occupiers have had to go to grade B when they would have preferred
grade A.”
Ben Bolton, director at Cooke and Arkwright, says: “You’ve got to admire the government for the decision to intervene. The skill is in providing a stimulus without curtailing private initiative. It is treading a fine line – and I hope it gets it right.”
Demand growing?
Demand is growing for Cardiff offices, but secondhand space is leading the way and the amount of available office space is spiralling upwards.
According to Savills, take-up doubled in the first half of 2014 compared with the first half of 2013 – rising to 250,000 sq ft. The total has been boosted by the International Baccalaureate Organisation taking 48,500 sq ft at Cardiff Gate.
However, DTZ points out that the last few quarters have been dominated by grade B lettings. The most noteworthy grade A deal in Q2 was for 15,000 sq ft to Centrica at 3 Callaghan Square. Meanwhile, the availability of office space has rocketed, up by more than 50% to 693,000 sq ft.
The hope is that rents will respond as the market heats up, rising from their current £22 per sq ft sticking point.
What has the government ever done for you?
The Welsh government has been an active participant in the Cardiff city centre office market.
It acquired JR Smart’s 79,500 sq ft No 1 Capital Quarter before completion. The deal, said to have been valued at around £15m, helped encourage the developer to move on swiftly with plans for an 84,000 sq ft development next door.
The government is also promoting the 90,000 sq ft Callaghan Square site, a key development in the growth area south of the city’s railway station.
In May, it awarded Balfour Beatty a £17m contract for the new office building. It bought the site from developer MEPC for about £7m.
The public sector is an important component of demand in the Cardiff office scene. Public Health Wales signed up for 39,500 sq ft at Companies House, and Finance Wales is expected to take 28,000 sq ft at No 1 Capital Quarter. Parsons Brinkhoff, a subsidiary of Balfour Beatty, is also expected to sign up at No 1 Capital Quarter.
What’s coming
Among the schemes in the pipeline are Rightacres’ 135,000 sq ft One Central Square, JR Smart’s No 2 Capital Quarter and the Welsh government’s 90,000 sq ft Callaghan Square.
More development is on the way after that – perhaps as much as 1.5m sq ft in the next five years. Among the attention-grabbers, Network Rail is planning a major redevelopment of Cardiff’s Central Station site, which could yield 340,000 sq ft of new offices in the window 2019-2024.
Data compiled by EGi shows developers piling into the market. Plans submitted for office schemes were up 38% in the year to the end of June 2014, compared with a 6% drop UK-wide.
