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News Release


Wales Property Outlook 2012

By Chris Sutton, head of Jones Lang LaSalle's Cardiff office

Cardiff, 8th January 2012 - The more optimistic amongst us had hoped for stronger signs of recovery by the end of 2011; however last year can best be described as disappointing and this poor economic performance has led to a sober re-assessment of recovery prospects for the UK economy says Chris Sutton, head of Jones Lang LaSalle's Cardiff office.
He continues: "The financial and on-going fiscal squeeze has left the UK economy weaker than expected whilst ‘events’ in the world economy means that for 2012 the long haul continues with, if anything, more risk on the downside."
So what does this mean for our commercial property sectors? 
• Prime yields level off – after a decade of rapid compression prime property yields have levelled off at 5-6%, as evidenced by the sale of the BBC/Welsh Government pre-let at Roath Basin at 5.25% and Admiral Insurance in Cardiff City Centre at just better than 6%.  Given the weaker short term outlook there is no prospect of further compression and prime yields are set to stay at their current levels during 2012.  However, the gap between property yields and other assets provides a cushion against renewed outward movement with interest rates set to remain low.
• Secondary gulf to widen – yields on secondary property across retail, office and industrial sectors, continue to move out and this polarisation is likely to intensify in a jittery, credit constrained market.    Throughout Wales, very few secondary investments will achieve better than 10% yield in this market, with pricing once again based upon fundamentals of location, lease and tenant covenant.
• Over-supply in the retail markets – the consequence of ending a ‘credit fuelled consumer boom’ is a significant over-supply of retail floorspace.  The UK average retail vacancy rate is 14.3% however for every thriving Cardiff City Centre, Narberth or Cowbridge there are many more deprived communities with retail vacancy rates of 20-25%.   The growth in on-line retailing will reinforce the need for structural change in many of our retail centres. 
• Retail lease expiries become the catalyst for swift change – in shopping centres and on the High Street; we are coming to the end of 25 year leases taken out in the 1980s boom.  According to my firm’s latest research, up to 25% of existing High Street and Shopping Centre leases are due to expire by 2013 or 50% by 2015.  Those retailers that survive will be in the driving seat as they force rent reductions and more flexible lease terms from their Landlords.  Even then, the growth in on-line sales will mean that most mature, non-food retailers will be net reducers of space - sub optimal stores will be ditched whilst retailer requirements will gravitate towards fewer retail locations.
• Shortage of Grade A offices – whilst office vacancy rates will remain high, there will be a distinct shortage of Grade A supply with a pinch point in Cardiff in approximately 12 months’ time.   With the notable exception of developer J R Smart, the pipeline of new schemes has dried up.  This will have consequences, not least on our ability to attract (or retain), footloose inward investors from the financial services and professional sectors. 
• Obsolescence - property obsolescence will increase in importance due to legislation, sustainability and occupier preference for modern stock.  Advances in technology will enable occupational flexibility and lower floorspace requirements. I expect a rapid devaluation in price for obsolete stock, probably after 2012, which in itself will create a great opportunity for developers with refurbishment expertise.  The flip side is massive risk for poorly advised holders of older stock. 
• Estate re-alignment – break clauses, lease expiries and organisational change allow portfolios to be re-aligned to better meet the needs of occupiers.  There are a number of private sector companies using lease breaks as a tool to improve the terms of their occupancy.  However, there has also been public sector re-alignment.  Welsh Government has undertaken a well thought out transformation of its administrative estate which has substantially reduced the number of properties occupied whilst improving the overall quality.  I expect this trend to continue in both the public and private sectors.
• Manufacturers ‘coming home’ – there is continued evidence of manufacturers bringing production back to the UK, due to rising costs in Asia Pacific and Eastern Europe, with associated issues of transport costs, quality assurance and supply chain risks.  I expect to see more production coming home in 2012.  With the corporate sector having significant cash reserves, the clear focus for Welsh Government should be to provide our established anchor companies with the confidence and support to re-invest. 
• Development wanted – to promote economic activity and help kick start the economy the Welsh Government will encourage new development.  All the signs are that they will continue their proactive approach toward policy reviews including planning reform, business rates and spatial City planning; whilst enterprise zones and infrastructure improvements will offer more visible action.
• Development opportunities – contractor tender prices are likely to remain low, presenting great opportunities for cost effective projects including new build and refurbishment.  Conventionally, developers use downturns to line up planning permissions for the upturn, however, the major cost of securing such consents will mean that only the strongest developers can indulge in this activity.  Development will return, but not as we know it.  Retail activity may focus upon redeveloping first generation out of town retail parks with, for example, restaurant demand strong as the distinction between retail and leisure becomes blurred.  The strategic opportunities in Cardiff Enterprise Zone will lead to new office schemes in the medium term.  Industrial development in 2012 will be demand led rather than speculative and may focus upon waste to energy, trade counter and B8 units for our internet retailers.
• Cash is king – I expect cash to be king again in 2012, as last seen in 2009 when our financial system locked down, confidence was weak and risk aversion increased.  Bank funding is likely to be highly selective with credit committees rightly demanding a high level of due diligence, before making any commitments at conservative LTV ratios.  With a scarcity of debt in the market, traditional property investors will struggle to compete with cash rich purchasers.  The increased supply of distressed assets released from bank de-leveraging will offer significant opportunities for the brave. For example NAMA, the Irish ‘bad bank’ has made plans to sell 25% of its property loan book by 2013.
With caution still the key note, the upturn will be driven by structural demand or pre-lets from companies recently starved of quality supply.  The property market recovery will accompany this gradual thaw with core assets in strong locations such as the M4 and A55 corridors benefiting first.  The underlying divisions between prime and secondary will remain wide and I do not believe that the structural changes facing certain aspects of our market are fully played out yet. 
Overall, I believe 2012 will start slowly but hopefully we will see a strong final burst to lift hopes for 2013.  Occupiers and investors have become risk adverse, however, as the economy recovers there is the prospect of a revival in occupier demand and we have many multi-national companies in Wales on which to base this optimism.