The annual Cardiff Report from global property consultancy Knight Frank shows that, even though the city’s property market was badly hit by the pandemic in 2020, Cardiff still achieved noticeable successes, and is anticipated to bounce back well next year when the recovery phase of the pandemic begins.
The report describes how the office lettings sector was badly affected by the Covid-19 outbreak, while parts of the property investment sector remained strong, the demand for industrial and logistics space continued to grow, and the city’s residential market saw intense activity across all price bands with house prices 7.3 per cent higher than a year ago.
Commenting on the report’s findings Matt Phillips, head of Knight Frank’s office in Cardiff, said: “While management of Covid-19 will continue to influence market sentiment and therefore demand across all sectors, Cardiff and the City region are well positioned to emerge quickly from the crisis. Increased levels of interest in the third quarter of 2020, particularly for ‘last mile’ industrial space, bodes well for the Cardiff property market as we move forward.”
Office lettings
In the office lettings sector take up in the first three quarters (Q1-Q3) was 138,213 sq ft – sharply down from the 287,009 sq ft for the same period in 2019, and hit hard by the Covid-19 restrictions imposed in Q2. The largest deal in Q2 was Starling Bank’s expansion at Brunel House with a five-year lease of the refurbished 14,075 sq. ft eighth floor.
The first signs of businesses looking beyond the Covid-19 crisis were evident in Q3 as enquiry levels improved and tenants began to formulate their strategy for reoccupation, and plan for future property needs.
Landlord Legal & General enjoyed two lettings at its comprehensively-refurbished Hodge House with Intelligent Ultrasound taking 7,188 sq ft and Currency Cloud signing up for 6,587 sq ft.
Elsewhere in Cardiff city centre financial services giant Legal & General, as a tenant, committed to consolidate its two Cardiff offices and bring 1,800 staff under one roof at Central Square, where the company will occupy 120,000 sq ft of office space in the £140 million Interchange building currently under construction and due to be completed in November 2022.
Matt Phillips said: “An increase in the number of large corporates making decisions on their real estate strategy over the coming months is expected. The largely successful enforced work-from-home period is increasingly not considered as a wholesale replacement to the office, but more of a temporary fix and potential component of a more flexible approach to future working. It is clear that for most tenants, the office will remain as a focal point to meet, train, collaborate and innovate. Landlords as well as developers need to embrace the changes to space planning now demanded by occupiers as a result of Covid
“The fundamentals of the Cardiff office market remain balanced with a well-defined core, limited supply of Grade A space, controlled development pipeline and a competitive rental profile when compared to competing UK regional cities.”
Capital Markets
The Knight Frank report found that despite a turbulent year the UK property investment market remained strong. Confidence in Cardiff at the start of the year was demonstrated by JR Smart’s sale of the new No 4 Capital Quarter Grade A office building to Greenridge for £33.4m, reflecting a NIY of 5.96%. In March 2020, however, the market paused as the Covid-19 pandemic and the implications of containment became clear, causing many businesses to reflect on their workplace strategy. Pockets of activity included the acquisition of the newly refurbished Grade A office, Two Kingsway, in Cardiff city centre by Delancey from Ardstone in April 2020 for £13.2m reflecting a NIY 6.2%, and the sale of the Global Reach business park in Cardiff Bay to Regional REIT for £8.42m, reflecting a NIY 8.85%.
Investment in the retail, travel, hospitality and leisure sectors were badly hit by lockdown measures, but there was high demand for the warehousing and distribution sector, with heightened interest in ‘last mile’ locations and development opportunities, albeit a lack of stock curtailed volumes earlier in the year.
Investment activity in Wales centred on smaller lot sizes where private investors and property companies remained active. In addition, the larger industrial-focused investors, such as Mileway – M7/Blackstone – and Urban Logistics REIT amongst others, had been acquiring large portfolios of industrial assets including those in Wales.
Industrial
Despite the uncertainty during the year, demand for UK Industrial and Logistics space continued to grow and fared better than many other commercial property sectors. The forced shift to online deriving from Covid-19 containment amplified e-commerce and led to rapid growth in demand for last mile/urban logistics. This placed significant pressure on traditional logistics space in and around town centres.
The current shortage of good quality storage and distribution properties across South Wales resulted in DPD having to purpose-build its new 60,000 sq ft warehouse in Swansea, while DX had to adapt existing warehouse space in Bridgend and Newport.
The viability of larger scale industrial development continued to improve as rental levels increased to over £6 per sq ft. Development to date had been limited to distribution/last-mile logistic facilities with 50,000 sq ft developed at St Modwen Park, Newport, which was let to Amazon. St Modwen was currently on site speculatively developing a further 30,000 sq ft and 100,000 sq ft that will be available in 2021. Similarly, Trebor Developments was progressing the speculative development of 46,000 sq ft at Junction 35, Pencoed, while last year Border Group completed the construction of 50,000 sq ft in Crumlin, Caerphilly that has since been let.
Residential
The Residential market came to a sudden and grinding halt at the start of the first Covid-19 lockdown. However once the residential market was unlocked in June, it surged to new highs with intense activity across all price bands, as prospective buyers reassessed their needs, wants and aspirations. The ongoing role of remote working caused some people to seek a better work life balance which could accommodate office and garden space.
South Wales house builders reported unusually strong demand for new housing during the lockdown, and while a number of residential developers had significant strategic land holdings that they were working through planning in and around South Wales there was still a strong appetite for consented, serviced sites.
As a result house prices grew dramatically with Halifax reporting that house prices were 7.3% higher than a year ago. Against this backdrop, Cardiff remained a property hotspot within South Wales, with an average house price of £264,474 – well above the Welsh average of £187,361.
Currently there was a lack of new build accommodation under construction in Cardiff city centre. In recent years, sites that became available were largely taken up by developers of student accommodation due to the cost value equation.
At present, there were only a handful of active schemes being undertaken by niche operators for open market flatted housing, including Brickworks in Trade Street by Portabella; Bayscape in Cardiff Bay by the Marine Group; and Schooner Wharf at Atlantic Wharf by Morganstone and Cardiff Community Housing Association. This could drive sales value evidence towards – and over – £400 per sq ft capital value.
In regard to the Build to Rent (BTR) sector the proportion of people living in private rented accommodation in the city centre had almost tripled since 2001, but none of it had been in purpose-built, professionally managed stock.
Conclusion
Knight Frank’s Cardiff Report says that while management of Covid-19 will continue to influence market sentiment and therefore demand across all sectors, Cardiff and the City region are well positioned to emerge quickly from the crisis.
Matt Phillips said: “Post-Covid, the high quality of living on offer in Cardiff, the vibrant mixed-used city centre environment and excellent connectivity will be of heightened importance in retaining the Universities’ talent pool and attracting businesses as well as staff back into the city centre.
“Meanwhile, investors remain eager to capitalise on achieved as well as future growth and the city offers opportunities in terms of value when compared to other major UK cities. All of this is backed up by a clear strategy to grow the economic profile of the City, embracing and delivering a thriving sustainable modern city aligned with what investors, occupiers and residents want.”
