This week a hefty document could have been landing on Wales’s business minister’s desk. Its contents have the potential to change the face of development in Cardiff. Out would go all of Cardiff’s refurbished out-of-date office stock. In its place would be a shiny Welsh version of Canary Wharf.
And who will build this? Edwina Hart’s independent adviser is to recommend the government use its gold-plated covenant to deliver 100,000 sq ft of speculative offices as part of a draft strategy that will see 1m sq ft built in the city centre within the next five to seven years.
The report’s publication has now been delayed after Cardiff City Council decided it might like to buy land heavily tipped to be the first phase of the Welsh Assembly government’s development strategy (see box).
The strategy, if adopted, would see speculative building start as early as next year, with the first tranche completed by 2014. If all goes well, another 100,000 sq ft would follow within six months, says David Goldstone, the man who oversees Enterprise Zones in Wales and an independent adviser to Hart.
The actual development risk will not be taken on by Wales, but its covenant will guarantee it, hooking in a pension fund or annuity. The funds won’t have any option but to have their heads turned, because this isn’t just some council, this is a fully fledged government offering up its backing.
One million square feet would be a tall order in anyone’s book; in the present climate it looks like madness.
Cardiff is expected to end the year having eaten up 400,000 sq ft of offices, according to Savills. This is down on last year’s total of 600,000 sq ft which included Admiral’s 220,000 sq ft prelet, but also down on the 10-year average of 490,000 sq ft. The AA recently decided to downsize in Cardiff, and there is speculation that Barclays’ purchase of ING could see its operation scaled down – something that will hit the Welsh capital hard. As Gary Carver, director of South Wales national offices at Savills says: “Cardiff needs some good news.” But Goldstone has a plan. Cardiff has between 10m and 12m sq ft of offices. Many of these are now effectively obsolete and should become residential.
The business case for developers is black and white, says Goldstone. Poor-quality offices are achieving rents of no more than £10 per sq ft. These are barely marketable and capital values are £100 per sq ft. Inner city residential would value them in the order of £200-250 per sq ft, “which leaves significant potential profit on converting to residential and hotel use, it’s a win-win situation,” he adds.
Agents seem keen to get any stock. “Any way of providing product in the area should be embraced,” says Ben Bolton, director at Cooke & Arkwright, “Such structures have often been met with criticism, especially when the project takes a prime site. However, we find ourselves in a unique market where most are struggling to operate, even with prelet opportunities, let alone speculative builds.”
At present, developers seem keener to play it safe. When Topland Estates recently bought the landmark Capital Tower, its decision was to keep the ageing offices as just that, rather than opt for another use. Until 2015, the 25-storey tower is occupied by Admiral. Daniel Evans, director at Powell Lloyd, who advised Topland on the purchase says, the deal was for cash on an unconditional basis.
No “hope value” was built into the sums, and for now, if they keep taking the present rent (stated in the sales prospectus as £1.8m per annum), by the time Admiral vacate, “they’ll be in it for half what they paid for it.
“I’ve discussed the plans with them and they want to get to grips with the building first, and try to let the space as it comes forward.”
Yet others might be less keen to see the government’s development progress. JR Smart is speculatively developing1 Capital Quarter, an 80,000 sq ft office building. The building sits in the Enterprise Zone. As one agent said: “This [WAG’s] proposal is not ideal and those developers such as JR Smart who have been prepared to build speculatively will not be happy.”
One Capital Quarter is still awaiting its first deal, although there are whispers that there may be some good news soon. However, these remain whispers and Alex Smart says delivery of the building has been slowed to match the pace of the market, and avoid any empty rates liability.
Goldstone knows there are problems. He says: “There’s been criticism about the time taken to establish the strategy, but it would have been unwise and foolhardy to rush into print before the vision and aspiration had been formulated.
“There’s a danger that the establishment of an Enterprise Zone is perceived as a panacea; it’s not.”
Confusion on Callaghan Square
The Welsh Assembly government won’t say where in the Enterprise Zone development will happen first. However, agents point to MEPC’s Callaghan Square where Hugh James is believed to have landed its long-standing requirement.
The government is believed to have agreed a head lease to kickstart construction. But now the council has thrown all the balls in the air by stating it is also interested in buying the land.
MEPC had submitted a planning application for 90,000 sq ft of offices on the development. A planning decision was deferred by the council in October, only to be approved three weeks ago, just one day before the council decided on whether to buy the land. The subsequent cabinet committee meeting failed to approve the purchase. Both, either or neither could still go ahead.
Adding space
Building 1m sq ft in Cardiff could win some friends at the city council. At the end of October, the council agreed a local development plan. It states plans for a further 40,000 jobs by 2026. Financial and business services will account for 55%. Gary Carver, director of national offices in South Wales at Savills, says assuming 75% of these are in sectors requiring office space, this could add up to 2.5m sq ft. Currently 1.2m sq ft of office space is vacant in Cardiff. “So if the council’s objectives are to be met – ignoring take up, homeworking and churn during this period – we need at least another 1.3m sq ft of offices built in the next 13 years, and probably more if you take into account suitability of much of the existing stock.”
