As the end of 2015 approaches, the city of Cardiff has made strides in attracting major occupiers, investors and developers to become a “City in demand”, according to a report from Knight Frank.
The 2015 Cardiff Office Market review, presented by Knight Frank’s managing partner in Cardiff Matt Phillips, explains that one major contributor to the overall investment appeal is “Vibrant, amenity rich and well-connected workplaces are the key to Cardiff’s further progression as a business location.”
Matt Phillips, continued: “The recent decision by Legal & General to commit to the Central Square scheme in Cardiff- the largest transaction in Wales to date with a projected value of up to £400m-has provided another example of the growing recognition of Cardiff as a UK business centre. The scheme will serve to encourage other investors to invest in the Welsh capital.”
Meanwhile, Mr. Phillips goes on to say, local developers Rightacres and JR Smart, who committed to two major speculative developments in the city, 2 Capital Quarter and 1 Central Square had timed their commitment very well. Both buildings are expected to be completed early next year, “with 60,000 sq ft of the 80,000 sq ft at JR Smart’s 2 Capital Quarter, and – we believe – 120,000 sq ft of the 135,000 sq ft at 1 Central Square already likely to be taken.”
He continues: “This is very good news for the City but it does mean that we are likely to have a shortage of new grade A accommodation until the next phases of development are undertaken. Therefore there is a window for refurbishment opportunities over the next six to 12 months.”
The research also reported that office take-up at the end of Q3 2015 was 303,002 sq ft, which is 24 per cent less than the same point last year. The main constraint is low Grade A availability stock, which fell by 46 per cent in 2014.
However, new active requirement levels remain strong at 301,000 sq ft, which is 9 per cent above the 5-year average, meaning take-up should increase.
In 2015, the largest deal was 2 Capital Quarter, which saw Public Health Wales agree terms on 51,652 sq ft of space. This move would enable the consolidation of several existing offices into the city centre.
While there was a 7 per cent increase in Grade A availability reaching 107,000 sq ft at the end of Q3, availability remained significantly below the five-year average of 156,000 sq ft. The city centre on the other hand remained fairly tight, with 6,250 sq ft at Number 1 Capital Quarter and 21,851 sq ft in 2 Callaghan Square being marketed.
The development pipeline was strong with 254,000 sq ft currently under construction, which is 23 per cent above the five-year average.
Rental growth is also expected due to tenant interest as new buildings enter the market, with Knight Frank predicting that prime headline rents will increase from £22.00 per sq ft (Q3 2015) to £23 by the end of this year and £24 by the end of 2016.
Knight Frank also said that investor demand for good quality regional stock is continuing to strengthen, which combines relative value against the South East and a recovering occupational market, resulting in yield compression for both prime and secondary office investments.
Throughout 2015, regional opportunities and investor’s appetites for them has grown substantially, resulting in increased activity in Cardiff, although a lack of prime stock has limited transactions. Investment volumes as of Q3 are at £61m, which is on par with the five-year average.
Matt Phillips added: “With the Central Square acquisition by Legal & General completing in Q4 however, total investment in 2015 will reach the highest annual total for the city on record.”
Prime yields moved in by 15bps in 2015 to 5.75%, the lowest level since 2007 but still above the 5% market peak. Meanwhile, investor interest going into 2016 is expected to stay strong along with the strengthening of the occupational market. Knight Frank forecast prime yields to remain below 6% into next year.
In 2015, the key investment milestones were led by Legal & General’s commitment to the £400 million Central Square regeneration scheme, with the first phase of office development expected to be completed Q1 2016, which BBC Wales is planning to relocate to by 2019.
So what does the future hold? Matt Phillips, says: “To ensure that Cardiff attracts further inward investment and captures the attention of occupiers from growth sectors, the city must offer the right blend of workplace options, infrastructure and amenity.
“Achieving this will require strengthening of connectivity both into and around the city. Development of new modern commercial space will follow.”
He concludes: “Cardiff is now increasingly recognised as a business location on the world stage. Only through building on the strong foundations already in place will the city continue to progress and secure the investment required for further growth.”
