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Chris Sutton sets out his views
CARDIFF, 23rd January 2017 - What a difference a year makes! However, it is just as important to remember what hasn’t changed. We have a strong economy with high employment, our dynamic capital city goes from strength to strength and there is now real progress across a range of major infrastructure projects.In broad terms, 2017 is unlikely to bring any real clarity on the eventual Brexit deal. Indeed, it is likely that we will have further bouts of turbulence and volatility as we move through what is, in reality, simply the first half of a two year negotiation.Rising InflationThe fall in the pound has led to increased prices for imports and may lead to increased inflation. The upward pressure on interest rates is likely to impact on property investment. However, rising inflation would mean that property, with its inflation linked rent reviews, will become an increasingly attractive asset class.In terms of the wider economy, inflation is likely to hit the retail sector the hardest in Wales, with our retailers enduring a ‘perfect storm’ of increased import costs, increased labour costs, rates revaluation as well as the continued shift to e-commerce.Prime v Secondary Overall, capital values in South Wales should remain broadly stable through 2017. However, this will mask a divergence between prime and secondary assets.Yields for prime properties should stabilise however secondary investments will be vulnerable as investors and funders focus upon core assets where there is occupier resilience. This will, however, create opportunities in the secondary markets for active investors.Investors in WalesUK funds and institutions have returned to the Welsh property market, following the post referendum pause, however their ongoing interest will be dependent upon occupier demand proving resilient.In 2017, we may see local authorities step into the investment market – following on from a wave of similar investment in England which culminated in one local authority purchasing a sale and leaseback of BP’s Sunbury headquarters for £350 million. The attraction is the comparative income which property offers when funded by prudential borrowing. We wait to see whether local authorities in Wales follow suit.Cardiff is the driver of growthThe BBC Wales headquarters and proposed Government Property Unit hub illustrates how Cardiff city centre leads the property market in Wales and is a driver of Welsh GVA. Prime office rents now stand at £25 per sq ft, a level which makes speculative development viable. This confident and vibrant city is to Wales what London is to the UK – the challenge for government in 2017 is to harness this growth for the wider capital region, whilst not losing sight of the unique asset that is our capital city. The City Deal needs to be delivered this year.Rating RevaluationApril’s Rating List is the first for seven years. Each revaluation adjusts the burden of business rates by having regard to the differential performance of different sectors and geographic locations.There will be many calls for extra relief from various ‘special case’ sectors. However, with rates now fully devolved to Wales, the real opportunity is to now use this power to leverage economic growth, for example, by exempting plant & machinery to incentivise business investment.Minimum Energy Efficiency Standards (MEES)The little noticed Energy Act in 2011 introduced restrictions on the marketing of commercial buildings with an EPC rating of F or G from April 2018. With a little over a year to go to this deadline, investors will continue to consider the wisdom of holding assets affected by this measure. One only needs to consider the millions of sq ft of first generation Welsh Development Agency units that may be caught by this measure to assess the impact on Wales. Some doubts have been raised as to whether the UK Government will implement these ‘MEES’ standards bearing in mind what else is going on in the economy. Right now, the regulations remain on the statute book and detailed guidance will be issued this spring.M4 Urban LogisticsThe letting of a new 48,250 sq ft unit in Newport to Amazon Logistics and a new-build 60,000 sq ft unit in Wentloog to DPD Geopost highlights the urban logistics trend.The growth in e-commerce has a long way to go and the planned reduction in tolls on the Severn Bridges can only accelerate logistics demand. A smart approach to strategic planning would allow the delivery of a bespoke distribution park along the line of the M4 ‘black route’.Technology ChangeTechnology and digital disruption will continue to reshape the property footprint of most industries from manufacturing to call centres.Technology is redefining how and where we work and will lead to companies reviewing and future proofing their real estate in response to these trends. We will see an increased focus upon smart buildings, connectivity and incubator technology.EU FundingThe Brexit vote shone a spotlight upon the industrial heartlands of the UK, not least ‘the Valleys’. The guarantee of funding committed under EU programmes through to 2020 is welcome however we await details of a replacement scheme.There is certainly a need for government at both ends of the M4 to create a stimulus package however, the Secretary of State has suggested that any replacement scheme by the UK government might not direct funding through Welsh Government. My prediction is that this will not be resolved in 2017. Residential InnovationWith Cardiff embarking on a ‘great expansion’ of predominantly traditional family housing, it may seem odd to highlight innovation. However, the UK is on the cusp of a ‘flat-pack’, or modular building revolution, using methods of construction common in student housing and budget hotels. The trick for Wales is to capture some of the supply chain opportunities.In addition, perhaps 2017 will bring the first significant PRS scheme in Cardiff city centre, with institutional investment in the private rented sector.Speculative DevelopmentThe availability of the right building can be fundamental to winning, or indeed, retaining a business in Wales. Outside Cardiff, the lack of new and modern floorspace is a structural weakness of the Welsh economy.With developers likely to be cautious in the short to medium term, it is unlikely that this position will change in 2017. My plea to Welsh Government is, therefore, to incentivise the private sector to deliver new floorspace. Measures could include simplified planning and, potentially, gap funding to address viability.To conclude, South Wales remains part of one of the world’s strongest economies and property markets, which offers resilience, liquidity and transparency. We should be confident about our prospects. However, with the real impact of Brexit not likely to be seen until 2019, the opportunity for Wales is to use this year to improve the attractiveness of our property sector to both investors and developers.
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