CardiffCommercial Property

Limited supply of commercial office space is holding back Cardiff

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Its annual Cardiff Report  showed that office take up of 300,000 sq ft in the first three quarters of the year was 20 per cent down on the long-term average for the period, with the lack of new office stock a particular factor.

Transactions of Grade A offices accounted for just 11 per cent of deals in the third quarter (Q3), compared to 35 per cent in 2016 and 67 per cent on 2017.

Matt Phillips, managing partner of the Knight Frank office in Cardiff, said:

“The restrictions on supply have put pressure on rent and incentives as competitive forces have built up through the year.”

Lettings at Two Central Square in 2017 established Cardiff’s prime office rent at £25.00 per sq ft and with all Grade A lettings this year achieving close to this figure current forecasts indicated that rents would rise with the next wave of development in 2020/1 to £27.00 per sq ft.

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According to Knight Frank’s Cardiff Report, Admiral Insurance’s letting of 65,091sq ft at Number 3 Capital Quarter was the headline deal of 2018 so far. Admiral was at capacity in its Ty Admiral HQ on Bridge Street and the new lease retained one of Cardiff’s most significant employers and the only FTSE 100 company headquartered in Wales.

The largest single office deal in 2018 was the purchase of Woodland House in North Cardiff, which was acquired by Cardiff and Vale University Local Health Board to house its administrative functions. The former Tesco House was occupied by the supermarket for 25 years before it vacated to consolidate operations in Dundee.

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Other notable Grade A transactions included the 11,000 sq ft lease taken by publishing firm Which? at 3 Capital Quarter and the 9,977 sq ft ground floor lease agreed by Keolis Amey at St Patricks House. In addition, Knight Frank had moved to new offices in 3 Assembly Square at Parmer Cardiff Waterside.

Matt Phillips commented:

“Grade A availability had risen at the Q3 point with the completion of Number 3 Capital Quarter to 167,995 sq ft – 24 per cent above the five-year average for the city. Even so, the major letting to Admiral Insurance and significant current interest for the remaining Grade A space in the city will mean a return to a level below 100,000 sq ft by the year end.

“The only new space being delivered in 2019 will be the completion in March of Number 4 Capital Quarter comprising 87,860 sq ft of Grade A accommodation.”

The commercial property investment market had remained positive throughout the first three quarters of the year, the report said, although investment volumes were being limited by stock availability. Consequently, yields were sharpening as competitive pressure built.

With 2017 a record year for office investment, a slight dip in activity was expected in 2018 as investment opportunities became limited, and over the period Q1-Q3 in 2018, £175m of offices had traded, 14 per cent below the equivalent period in 2017.

Nonetheless, the 2018 total is more than double the 10-year average for the period.

Matt Phillips said: “Encouragingly, uncertainty emanating from the political arena has not proved a disruptive influence on investment decisions so far.”

The headline transaction of 2018 to date has been the £84.5m acquisition of Cardiff Waterside by Global Mutual. Covering 11.88 acres, the scheme comprises seven office buildings that provide 402,300 sq ft of grade A plus MSCP office space. Two land sites are also part of the estate, which could be developed to provide a further 360,000 sq ft of new grade A office space. The deal reflected a net initial yield (NIY) of 8.25%.

Other major deals to complete in 2018 included the £23m acquisition of No 2 Capital Quarter by Tesco Pension Fund reflecting a NIY of 6.4% and Topland’s sale of Capital Tower – the tallest office building in Wales – to Trinova for £25m reflecting a NIY of 7.5%.

The report found that Cardiff reflected well in terms of value and performance for investors, and the total return for Cardiff offices was forecast to reach 11.3 per cent in 2018 – one of the highest of the major UK cities.

“Furthermore, when investing in Cardiff buyers are now more comfortable that they can retain sufficient liquidity to weather any market turbulence,” said Matt Phillips. “The sustained attention of investors is a result of Cardiff’s growing standing as an international business hub. An ongoing series of office development, such as at Central Square and Capital Quarter, has underpinned growth in the office leasing market and proved a catalyst to bringing new high profile occupiers to the city.

“Moreover, investment at Cardiff University in its tech and innovation campus is serving as a lure to the fast growth companies of the future. These factors combined with improved connectivity and amenity has meant the offer of the city has improved.”

Looking ahead, the report showed that Cardiff’s 10 per cent growth in resident population since 2008 – making it one of the fastest growing cities in the UK over the period – was forecast to be matched by a further 10 per cent increase by 2028.

The pace of change in the way people work, live and socialise was accelerating, and this ‘lifestyle’ shift was creating an unprecedented array of challenges and opportunities for both business and UK cities.

Employment and residential development was escalating and would change the shape of the city, with the comprehensive redevelopment of Central Square and Capital Quarter obvious changes alongside the regeneration of St Marys Street and Mill Lane as a Leisure Quarter. Pedestrian links from central station to the retail heart were driving people toward The Hayes and St David’s Shopping Centre.

A further example of change was the way people were being housed.

“Growth in the private rented sector in the UK is underpinning the development of purpose built rental blocks. The build to rent sector in Cardiff is at an early phase, but its growth could enable increasing numbers of renters to live in the city centre – in many cases in locations where renters could not afford to buy,” said Matt Phillips.

Rhys Gregory
Editor of Wales247.co.uk

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