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JLL’s Chris Sutton discusses the Welsh commercial property market for 2015
Chris Sutton, head of JLL’s Cardiff office, looks in to his crystal ball and discusses what is in store for the Welsh commercial property market for 2015.
In broad terms, conditions in the Welsh commercial property market improved markedly in 2014. Businesses have been the driving force of the recovery and as corporate investment has picked up, so occupiers have re-entered the property market to expand or consolidate operations.The past year has also been positive for investors with further yield compression as UK funds and institutions look once again to Wales, alongside other UK regions. This is, in part, due to the sheer weight of money targeted at property but also reflects a shift away from London in search of better returns.Last year I stated there was good reason to be optimistic about the Welsh property market but also highlighted downsize risks of national debt and the volatility of sterling – the latter not being helpful to our Welsh manufacturers. Both of these concerns remain valid.Pressure Maintained on Property YieldsThe consensus is that base rates will rise during the second half of 2015. However, most commentators predict a gradual increase and the financial market, judging by 10 year gilts, appears to price in an extended period of cheap money. For investors, the structural advantage of the UK is an advanced economy which is a global safe haven. Given these factors, and the weight of money available, there is scope for further yield compression. Political RiskWhilst economic concerns have moved down the risk register, political risk has become more apparent. In less than six months, we face the prospect of a general election which may, or may not, have a clear outcome. In addition we have an Assembly election in 18 months’ time and a continued debate on the devolution settlement, following the Scottish referendum.Finally, any UK referendum on EU membership can only affect business confidence due to the risks of losing access to a single market of over 500 million people.
Construction Cost InflationIt is not simply a shortage of bricks that is affecting the construction industry and we have seen skills shortages across a number of trades. Meanwhile contractors have been less inclined to discount risk when pricing new projects whilst sub-contractors have sought to increase their margins. Construction cost inflation will therefore accelerate; nevertheless, construction output should increase strongly during 2015. The CBI report ‘Brickenomics’ calculated construction in Wales at 10% of GDP and, therefore, a vital contribution to the wider economy. Grade A ShortfallWith the honourable exception of central Cardiff, there has been little or no speculative development in the office or industrial markets across Wales since 2007. There is now a lack of new and modern floorspace and this may become a structural weakness of the Welsh economy.As occupier confidence returns, so the public sector will need to prioritize new floorspace. Measures could include simplified planning and, potentially, gap funding to address viability issues.Increased Take-up Prompts Rise in Prime Rents
The shortage of Grade A floorspace is likely to lead to a return to headline rental growth in Cardiff and other prime locations. JLL forecasts increase in Cardiff’s prime rents of 3.5-4.0% next year. The bigger picture for Central Cardiff Enterprise Zone is catering for the relocation of back office functions from London, where prime rents are three times the level of those in Cardiff. The strength of employment growth, combined with functional obsolescence of secondary buildings suggests that, alongside inward investment, relocations will also continue to be a strong driver of demand. Redefinition of the Welsh Retail Hierarchy Last year I reported on ‘Retail Winners and Losers’ and the irresistible rise of Cardiff’s retail offer. The redefinition of the Welsh hierarchy has now taken hold. The changing ranking of locations by range and spend will become more evident in 2015 as lease expiries and break-clauses act as a trigger for change. The good news is that Newport is on the way up. Friars Walk shopping centre will be completed in 2015 and Admiral’s new city centre office has brought additional life and vibrancy to Newport. Supermarket Shake-UpIt has been a tough year for our supermarkets, particularly Tesco, the dominant operator in Wales. However, whilst the discounters have significantly eaten into the market share it is too early to write off the big four grocers. They operate from the best locations in Wales and have the room both to innovate and develop ‘click and collect’ capabilities.A growth market for 2015 will be the ‘open all hours’ convenience store, the modern day Arkwright’s corner shop. Indeed, convenience and smaller parades on the edge of town could become the new ‘prime’. Urban LogisticsOur newspapers were full of horror stories surrounding ‘Black Friday’ and the sad news regarding City Link. The reality is that a large proportion of the population is now at ease ordering on line and having bulky goods delivered to their doorstep. This means increased demand for parcel hubs which enable a rapid response and quick delivery time. The practical difficulty is that these 24/7 operations need to be away from residential areas with strong communication links. There is now a strong case for bespoke distribution parks to be developed on both the M4 and A55 corridors; otherwise we will lose the growing number of distribution jobs in this sector across the border. Re-shoring and Near-shoringPinewood Studios, Tenneco, Calbee, Deloitte, CGI, Alert Logic and Raytheon are just some of the Welsh successes of a refreshed inward investment strategy last year.Re-shoring of manufacturing to Wales will continue this year, notwithstanding the impact of lower oil prices on inter-continental transport costs. Meanwhile, the near-shoring of services industries, including financial and professional, from more expensive UK locations will accelerate. Wales offers a strong business environment but we must do all we can to improve this.Residential Stability?The residential market continues to be dominated by politics and Government intervention is both the greatest support and risk for this sector. For example, in 2014 we saw ‘Help to Buy’ introduced to Wales, real progress on the new Planning Bill yet suffered from the glacial delivery of outstanding LDPs in Wales. Welsh house-builders were impressed by the short term of office of Carl Sargeant as Housing Minister and want to see his good work continued, not least the rolling back of aggressive sustainability measures. Sustainability has become fashionable in house-building as rising build costs and supply chain pressures drive innovation. A key driver is the consumer for whom property operating costs are important. Market pressures surely offer a more sustainable approach to sustainability than the blunt instrument of Government policy.In summary, the next twelve months should see a consolidation of the economic recovery however; there remain many challenges for the property industry to overcome.
Lead Director - Cardiff
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Cathrine Harrison - PR
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