Money poured into Wales last year to the tune of around £655m-£700m. It pretty much doubled 2013’s total and surpassed the pre-recession years of 2005 to 2008.
Agents use superlatives such as “stellar” to describe the market’s performance, with Andrew Gibson, associate director in DTZ’s investment agency team, going as far as to say it was his best in 10 years. He calls it “An excellent year to be an investment agent in Wales.”
Granted, 2014’s bumper crop of deals may look a little inflated coming off several years of more subdued activity, but Savills’ director of UK investments Ross Griffin says there were “significantly more transactions”.
The weight of money flowing into Wales continued to drive yield compression and Griffin expects prime yields to compress further this year. Secondary stock yields are also under pressure. “This is where we will see the biggest change,” believes DTZ’s Gibson. “Secondary yields will start to align themselves with prime, which will assist the market greatly.”
Cardiff’s Oakleigh House is a good example according to Gareth Lloyd, associate in investment with Knight Frank. Sold to Mayfair Capital, it achieved a yield of 7.75%. “Twelve months beforehand it would have been a long way from that level,” he says.
So why the buying frenzy? “Investors see it as much better value than London,” explains Lloyd, “and they are very excited about the story here.”
There is also strong demand from a swathe of different buyers, and a more global flavour to the money buying up property. Cardiff has seen Ty Hywel House sell for more than £40m, on a 5.3% yield, to a Kuwaiti family trust, and Willcox House sell to a Chinese investor for £8m, reflecting a yield of just over 9%. Meanwhile, increasing numbers of US funds with deep pockets are circling, such as WP Carey which paid £20m for Admiral House in Newport.
Last summer before JLL sold a £2.9m Burger King unit in St John Street, Cardiff, to a local, private investor, one potential buyer flew in from Madrid with “a very attractive offer” and another from Malaysia was also eyeing the opportunity.
There is also an influx, says Graham Davies, investment director of Cooke & Arkwright, of new private equity entries – among them Maya Capital (see panel) and Clearbell.
Knight Frank’s Lloyd identifies three key ingredients that are putting Wales on the radar: good rental growth prospects, infrastructure improvements, and new office development.
There has been concern that a lack of institutionally fundable stock could be the only potential brake on the resurgence. While volumes in Wales are growing, Lloyd says they remain a fraction of that of other regions and they would be much higher if there was more product of a certain scale.
But there is a belief that is now being addressed with developments such as Cardiff’s Central Square and Callaghan Square which should be attractive to big funds.
Institutions are becoming increasingly interested in alternative uses such as hotels, student accommodation and the PRS sector. However, retail was the star performer with M&G’s £156m purchase of Parc Trostre at Llanelli being a big headline grabber.
At the time the investor was not actively looking to acquire more assets in Wales. “But,” explains Justin Upton, deputy fund manager of the M&G Property Portfolio, “when it came onto the market it gave us the perfect opportunity to purchase the dominant retail destination in south-west Wales.”
M&G, which already owns Cwmbran shopping centre, says the merits of the new acquisition were clear. With its line-up of blue chip retailers it had become the area’s “go to” retail destination, explains Upton.
Justin Millett, head of capital markets at JLL, says several big retail park deals like these “buoyed the volume numbers”.
Views are mixed on whether 2015 will top last year’s soaraway volumes. But, says James Nicholas, investment partner at Alder King: “The positive trajectory has continued into the first quarter.” So it has been a decent start at least.
Case study: Maya Capital
London-based real estate and private equity investment firm Maya Capital has just made two purchases in Wales.
The company has an agreement with a European institutional investor, who prefers to remain nameless, to pour £100m equity into secondary assets in regional cities across the country – and its first acquisition was a £6m purchase of a 66,800 sq ft building in Swansea, occupied by the DVLA. Both its short-term lease of 4.5 years and 10% yield fitted neatly with Maya’s search criteria.
So too did the ingredients of its second Welsh investment – a £6.7m purchase of Knox Court in Cardiff, 60,100 sq ft leased to Legal & General. Again 4.5 years remained on the lease and, in that case, a 12% yield also appealed to the investor.
Maya’s managing partner David Pralong explains: “We are looking for single assets with one to four years income certainty so we can pull those together.
“We are monitoring 169 sub-markets around the UK so our recent investments in Wales were driven more by opportunities rather than specifically targeting the region.
“But, having said that, cities in Wales are very interesting for us because they are at the stage in the investment cycle where we want to be.”
The company, which has focused on higher yield opportunities within the M25, is now spreading the net wider so it can be, as Pralong puts it “ahead of the tide of institutional money”.
