Mixed messages A new headline rent has been set after a slow period, but the downturn is expected to stop further increases. By Stacey Meadwell
Just as Swansea’s office market starts to get going, the economy bites back. In the summer, a new headline rent of £14.50 per sq ft was set, up from £12.75 per sq ft which had been the top rent for at least two years.
But now there is no new space coming forward in the city centre and, with speculative starts unlikely in the current economic climate, there is little opportunity for further rises in this year or the next.
The £14.50 per sq ft paid by government agency the Vehicle & Operator Services Agency on 30,000 sq ft at Ellipse, a Welsh Investment Strategic Partnership building and part of the SA1 mixed-use regeneration, is significant. This is not just because of its push on rentals but also because it means Swansea’s office market is moving to a level where it might become financially viable for the private sector to build without public-sector assistance.
Ellipse was one of several buildings put up with government aid and, despite the rapidly cooling economy, agents say they had three companies fighting for the space.
Peter Loosmore of Lambert Smith Hampton’s Swansea office, who acted for VOSA, points out that Ellipse, with its BREEAM “excellent” rating and flagship design, provided something different. “Negotiations were difficult because there was competition,” he says.
Initially, space at SA1, on the site of former dockyards, was slow to let but what is completed is now being taken up rapidly. For example, the 42,000 sq ft Langden House is aimed at the SME market, offering small suites for sale or rent. Five units have been sold and 10,000 sq ft is under offer.
Rhydian Morris, associate at Knight Frank, says: “Yes, people are going to say it is hard to get finance but, at the moment, we aren’t seeing that issue because there is not an influx of stock in Swansea. I would be very surprised if we didn’t get rid of all of Langden House by the first quarter next year and then there will be nothing left until something else comes forward.”
It is equally frustrating for agents when take-up this year is anticipated to be on a par with the annual average. Morris says that Swansea traditionally tots up 150,000-200,000 sq ft pa in office lettings. “It shouldn’t be far off 150,000 sq ft this year if deals are completed,” he says. “The market is hanging in there. We are fairly reliant on expanding indigenous occupiers but, with many still in old stock, there are opportunities for them to move and churn will continue.”
But if companies want to move out of secondhand stock, where rents languish at around £8-£9 per sq ft, into new space, they will have to take a prelet.
Outside the city centre, one scheme is due to be completed this year – Kenmore’s Crucible Park. Speculatively developing two buildings totalling 100,000 sq ft even in a booming economy and with annual take-up at peak levels would be seen as a brave move but the developer remains confident the space will let.
Andrew Brooksbank, investment director at Kenmore, says: “We always try and make sure we aren’t coming on stream with our developments with lots of other stock. There is virtually no space left at SA1, so we are going to have limited competition and there is good interest.”
Quoting rents are £1 less than at SA1 at £13.50 per sq ft. The 30,000 sq ft and 70,000 sq ft buildings have been designed so they can be easily split for multiple occupancy.
Tough-talking tenants
Given current market conditions, Brooksbank is prepared for “any prospective tenant to negotiate hard” but intends to stand firm on the rent.
“The exit yield has to be a lot softer than we would have anticipated 12 months ago. The intention is to probably look at selling on when the buildings are well let but we would have done that anyway,” he says.
Knight Frank is joint letting agent with Lambert Smith Hampton, and Morris believes that there are around 100,000 sq ft of active requirements in the market, including a local newspaper, which is looking for 15,000-20,000 sq ft.
Despite the confidence in letting Crucible Park, Kenmore has no plans to develop more in Swansea. Indeed Brooksbank laughs at the suggestion, saying: “At the moment, we are focusing on getting this one let.”
In the meantime, Swansea is left with a finite amount of new stock and scant opportunities to refurbish secondhand stock to a high level. Agents say they would be happy to weather the storm with stagnant rents but there are wider economic concerns.
Loosmore says: “If rents stagnate, that’s fine and an increase in incentives is better than having empty buildings. The economy is undoubtedly a concern because, if businesses are finding times tough, then there is a risk of empty space.”
How is the economy affecting the city’s two major regeneration projects?
While the office segment of SA1 stays buoyant, it forms only one part of the wider regeneration of Swansea Bay.
As in many places, residential development and in particular flats form a substantial chunk of the regeneration. However, according to recent research by CB Richard Ellis, house prices in Wales have fallen by 9.2% in the past year.
Fiona Rees, executive director of regeneration body Swansea Bay Futures, says that housing development is slowing down and the time is being used to reappraise the mix, with town houses looking more likely than flats. The problem with this is that family housing generally does not yield the same returns as dense flat developments, even in a bull market.
“Expectations in terms of apartments are changing, developers aren’t anticipating the same level of return and there is concern about making sure there isn’t an oversupply of apartments,” says Rees.
“There are a couple of sites on SA1 where the deals have been signed but construction hasn’t started because of funding issues. Nobody has cancelled their plans but there are no clear start dates beyond completing the groundwork.”
She anticipates that these delays will add 12-24 months to the 10-year time frame for the project.
The news is less gloomy for Hammerson and Urban Splash’s regeneration plans for 32 acres in the city centre, purely because the scheme is in its infancy. The two companies have been chosen as preferred developers for the 10-year project, which could see around 600,000 sq ft of new retail space and 1,000 homes built.
A first draft of a masterplan was submitted last month to Swansea city council and the Welsh Assembly Government.
“We are several years away from building anything. City-centre regeneration is a cornerstone for our business and I can’t see that changing – and our passion for the project hasn’t changed,” says Simon Betty, development manager at Hammerson.
“It is quite likely that, over the coming years, the masterplan will be quite different from how it is now, because who knows where things like the residential market and retail requirements are going to be in three or four years’ time.”
The developers await feedback from the public sector early next year with a view to firming up the masterplan for public consultation.
Betty sees 2009 as being very much about sorting out land ownership, legal issues and deciding on a planning strategy. Part of that will be negotiations with Tesco, which currently occupies a chunk of the regeneration site. The Hammerson-owned Parc Tawe is being discussed as a “mutually desired” relocation site.
Market at a glance
New office rents in the city centre are £14.50 per sq ft
Secondhand office rents are £8-£9 per sq ft
Kenmore is quoting £13.50 per sq ft for the only new out-of-town scheme under construction
In-town retail rents are stagnant at £160 per sq ft
Parc Fforest Fach has the highest out-of-town retail rents in Wales at £50 per sq ft
