Wales’s investment transactions almost topped £1bn last year – up £300m on 2014 and a record high, according to research by Cushman & Wakefield.
The main beneficiary has been Cardiff’s office market, fuelled by new development, strong demand and expected rental growth.
In September, Wales celebrated its largest-ever property deal when Legal & General made a £400m investment in Rightacres’ Central Square, Cardiff, where the BBC has committed to a 150,000 sq ft headquarters.
The forward funding of the BBC building naturally grabbed the headlines, but it wasn’t the only high-profile deal. For example, French investor Amundi Immobilier bought Admiral’s One David Street building for about £70m – a sub-5% yield.
According to Savills, £300m was invested in the Welsh capital’s office stock in 2015, compared with £60m the previous year.
Savills director Ross Griffin says: “There has been a lot more quality product on the market over the past year and Cardiff offers real value compared with other regional cities.”
Although the BBC and Admiral deals achieved sub-5% yields, they are the exception. Cardiff’s prime yields stand at about 6%, reflecting good value in the face of competition from other regional markets.
“When you compare that with Manchester, where yields are below 5%, it shows how attractive Cardiff is,” says Cooke & Arkwright’s Nick Lawley.
Cardiff city centre office take-up reached 462,000 sq ft in 2015, the second-highest level on record, and investors are encouraged by strong occupier demand.
Agents predict that grade-A rents for the city centre will rise from £22 to £25 per sq ft by the end of the year. By comparison, Birmingham’s rents are tipped to hit £33 by the end of the year and Manchester’s to reach £35.
“The appeal of Cardiff is that there is so much scope for [rental] growth,” says Cushman & Wakefield’s Andrew Gibson. “Even if rents hit £25, it is still a very competitively priced city.”
Such strong market dynamics are attracting a far greater variety of investors than would traditionally have ventured into Wales. And although UK institutions continue to be active in this market, they are not the only ones buying.
Hong Kong money purchased Atlantic House, a French investor bought the Admiral building and Dubai-based Rasmala Group and Gulf Islamic Investments from the UAE spent £30m on the Airbus buildings in Newport.
Knight Frank partner Matt Phillips says: “A few years ago, Cardiff lacked strength in depth when it came to the type of investors it was attracting, but supply of the right product at competitive yields has definitely broadened the appeal.”
Current prime investment stock on the market includes the National Grid Pension Fund’s sale of the 110,000 sq ft office block at 3-4 Callaghan Square, Cardiff, with an expected yield of about 6%. A similar yield is likely when the Welsh Assembly Government sells its 79,000 sq ft Capital Quarter, due to come onto the market in the coming weeks.
The challenge now is to broaden the investment appeal beyond Cardiff’s prime office market to a range of asset classes throughout south Wales.
Deals such as the sale of the Airbus building indicate there is appetite for the right office assets. A number of retail and leisure deals are also encouraging, such as Patrizia’s £19.84m purchase of the Primark unit on Queens Street at a yield of about 4.8%, and NewRiver Retail’s acquisition of the city’s Capitol Shopping Centre (see p72).
Outside Cardiff, L&G acquired Merthyr Leisure Village from Atlantic Properties for about £15m. Last year also saw M&G spend £115m to acquire Bridgend’s McArthurGlen designer outlet store from TH Real Estate, and international consortium Otium Real Estate paid £14m for Newport Leisure Park.
Whether it be November’s opening of Newport’s £117m new shopping centre Friars Walk, or Swansea city council’s selection of a development partner for its two key development sites, there is growing confidence that such investments will generate a host of new opportunities outside the capital.
“There is certainly a ripple effect taking place, with investors keen to look beyond Cardiff,” says EJ Hales’s Dan Griffiths.
“Investors are also prepared to look at stock higher up the risk curve and that is generating much greater activity.”
L&G builds Welsh portfolio
L&G’s £400m commitment to Cardiff’s Central Square is not a one-off foray into Wales. The investor has targeted a number of Welsh assets in a strategy that looks beyond the capital.
In addition to Central Square, L&G and its various funds have transacted about £75m of Welsh assets since December 2013.
Acquisitions included the £18.8m Cardiff city centre office Hodge House, mixed-use Cardiff building Imperial Gate and the November 2015 purchase of Merthyr Leisure Village. This followed the sale last July of Cardiff office and hotel building Helmont House for £34.6m to Knight Frank Investment Management.
Legal & General Property’s senior transactions manager, Tom Roberts, says Cardiff’s office market has strong credentials. “It is a capital city that offers a considerable rental discount compared with other top UK cities,” he says. “The prospects of rental growth are strong, but Cardiff will still offer a discount to the likes of Bristol and Birmingham.”
L&G’s main focus for 2016 will be letting space at Central Square and moving ahead with other phases, such as the delivery of PRS. However, Roberts will keep a close eye on other investment opportunities right across Wales.
“We are always open-minded about where we invest,” he says. “It is about being deal-led and focusing on relative risk and return.
“The Merthyr acquisition demonstrates that we are very happy to invest in areas outside Cardiff if it is for the right stock.”
