A resilient UK economy, changing occupier requirements, continuing interest from overseas investors and a strong focus from government will drive the commercial property market in 2017, according to the UK Regional Cities office market research from commercial property consultants Knight Frank.
Knight Frank forecasts indicate that the UK economy will grow by 1.5% in 2017, lower than 2016 but high enough to maintain a steady level of demand for commercial property.
And in Cardiff the office development pipeline is the highest for a decade, with new schemes attracting new occupiers to the city and supporting rental growth, according to Matt Phillips, who heads Knight Frank’s Cardiff office.
He said: “The UK property investment market has started 2017 in a positive mood having shrugged of the turmoil of early last year. Buoyed by positive economic data and active occupiers, investors are actively searching for regional opportunities.”
“Overall Cardiff office take-up increased 11% during 2016 to reach 685,600 sq ft, a total 39% above the 10-year average. Notably, this also is the highest level of leasing activity recorded in the city for more than a decade.”
The largest deal of 2016 was the pre-let of 100,000 sq ft at Two Central Square by Hugh James Solicitors. The law firm agreed a 20-year lease with plans to consolidate its two existing offices on completion in August 2018. This was one of 11 deals in excess of 10,000 sq ft to complete during the year, up from nine in 2015.
“The public sector was the most active business group, representing 23% of total office take-up, with three of the five deals over 20,000 sq ft agreed by a public sector organisation.” said Matt Phillips.
He added that despite the high level of leasing activity, Grade A availability had risen to 185,400 sq ft by year-end – twice the level recorded in Q4 2015. Nonetheless, based on the current level of demand, this represented Grade A supply for just nine months.
The level of new space coming to market in 2016 had contributed to the rise in vacancy. Development completions during the year totalled 308,000 sq ft of which, 214,000 sq ft came to market without a tenant secured.
“The development pipeline up to the end of 2018 stands at 423,000 sq ft,” he said. “Of this total however, only 173,000 sq ft is available. With further lease agreements prior to practical completion likely to reduce this number further, the impact of availability will be minimal.”
Following recent lettings at Central Square, the prime headline rent in Cardiff increased to £25.00 per sq ft in 2016, the first rise for three years. Forecasts indicate that the prime rent will be maintained at this level throughout 2017.
Commenting on changing trends, Matt Phillips said: “On-going technological disruption is forcing businesses to rethink and restructure and the characteristics of market demand will change as a result. There will be a greater number of smaller deals driven by specialist project teams locating away from mainstream businesses, as well as from a burgeoning SME supplier base serving big business.
“In addition, central government is set to play a major role in the fortunes of the regional cities both from a political and new business sense.
“Consolidation of the UK government office estate is creating opportunities in the regional office markets. The strategy of creating collaborative hubs has led to large-scale requirements for new office space across many UK centres – including Cardiff. “
In the commercial property investment sector a strong occupational market and favourable exchange rates supported investor interest in Cardiff during 2016. Yields held firm and continued to offer value when compared to other regional opportunities.
Knight Frank expects UK institutions to be a key buyer group in 2017 alongside overseas buyers who will be looking for regional UK opportunities in their search for yield, further encouraged by the recent weakness of sterling.
Gareth Lloyd, partner in Knight Frank’s Cardiff investment agency team, said: “Following a record level of office investment in the previous year, investment activity in Cardiff in 2016 was more subdued. Investment turnover fell by 55% during the year with office sales amounting to £107m. Nevertheless, the fall is from a high base. Tellingly, the 2016 total is 12% above the 10-year average and represents the second highest of the past 10 years.”
The acquisition of 3 & 4 Callaghan Square for £32m by Deutsche Asset & Wealth was the largest transaction to complete in 2016. The properties are located in Cardiff’s central business district and current tenants include British Gas, the British Transport Police Authority and Zurich Insurance. This sale was one of four sales over £10m completed during 2016.
The £21m acquisition of One Capital Quarter by a private investor was the second largest transaction of 2016. Significantly, private money accounted for 22% of total investment in 2016 – up from just 4% in the previous year.
Gareth Lloyd said: “Overseas buyers remained active in 2016 however, reflecting an acceptance of the growth vision for Cardiff. Foreign money accounted for 37% of investment turnover representing the highest concentration of overseas capital in the city since 2011.
“The fall in the value of sterling will further bolster the case for investment into UK property moving forward. Investment from domestic sources fell from 24% to 21% with UK institutions largely absent from the market.
“Whilst the appetite for prime stock has held firm, the market for secondary assets has been more challenging. US Private Equity buyers continue to show interest, particularly lot sizes in excess of £20m, albeit opportunities in 2016 have been few given the level of expected return.
“Notwithstanding further market shocks, we anticipate that prime yields will stay at 5.75%. This is now unchanged for almost 2 years. At this level yields remain 75 basis points above the market peak of 5.00% recorded in 2007.”