Provision of quality space is the key challenge for 2014 ; Director of Jones Lang LaSalle in Wales Chris Sutton predicts how the commercial and... [Western Mail (Wales)]
(Western Mail (Wales) Via Acquire Media NewsEdge) Provision of quality space is the key challenge for 2014 ; Director of Jones Lang LaSalle in Wales Chris Sutton predicts how the commercial and residential properties market in Wales will perform this year
There is good reason to be optimistic about the Welsh property market in 2014 as the economy regains some vigour, investor confidence improves and strong corporate balance sheets encourage increasing capital expenditure.
Balanced against this are continued downside risks of national debt, as well as current growth being built on low interest rates and increased consumer spending. In addition, the strength of sterling is not helpful to our Welsh manufacturing exporters.
Nonetheless, this time last year we suggested the foundations for recovery were in place and now we can look forward to improved demand and an uplift in rents and capital values.
UK growth exceeds expecta-tions Our research suggests lower inflation, rising disposable income and buoyant house prices will drive UK consumer spending, leading to growth exceeding expectations.
The Bank of England has the unenviable task of deciding when to push up interest rates and the market will be dominated by speculation as to when this will happen and by how much.
Whatever happens to interest rates, we do not envisage prime property yields rising in 2014.
Property yields for core assets have not re-priced down towards artifi-cially low gilt rates or corporate bond rates of 1.8%-2.5%.
Indeed, as the buffers are at historically high levels, they can absorb initial rises in interest rates.
Differences within the second-ary market A feature of this downturn has been the widened yield gap between prime and secondary markets.
Very few secondary investments in Wales achieved better than 10% yield last year with pricing once again based upon the fundamentals of location, specification, lease length and tenant covenant.
As the outlook improves in 2014, this yield gap should reduce and there could be marked yield compression for good quality secondary stock. However, for less secure income, rising interest rates will inevitably push yields yet higher, leading to a widening spread between different qualities of secondary stock.
Reduced lending margins take banks into non-core markets A gradual rise in interest rates should lead to an increased availability of capital which, combined with greater competition between lenders, should force margins down.
There is also evidence across Wales of the increased appetite to fund alternative sectors including student accommodation, healthcare, renewables and hotels.
However, the traditional private residential rental sector is likely to be the fastest growing sector this year.
Retail winners and losers Cardiff city centre has moved from strength to strength, attracting yet more international retailers and securing a ranking as a UK top ten retail centre, according to 'Going Shopping 2013'.
However, with the honourable exception of 'jewel in the crown' centres such as Narberth and Cowbridge, the majority of Welsh retail centres, large or small, have been severely impacted by reduced consumer spend and the growth in online retailing.
Newport Council has taken the brave decision, albeit with associated risks, of underwriting the Pounds 90m Friars Walk Shopping Centre redevelopment.
Meanwhile, Swansea languishes and the council may need to address its ground leasehold policy within its city centre in order to incentivise new retail investment.
Grade A offices The prospects for Central Cardiff Enterprise Zone improved markedly in 2013 with new office floorspace now available at Capital Quarter and master planned development sites being promoted both north and south of Central Station.
The Central Square proposals will offer a suitably high quality vision for the gateway from Central Station and, through these initiatives, Cardiff has put itself in pole position for new financial and professional services companies considering a UK relocation.
Welsh Government - a wider perspective Across a number of departments, policy has moved toward a 'wider perspective' with co- ordinated action now increasingly proposed at a regional level.
For example, the draft Planning (Wales) Bill sets out a tier of regional planning to co-ordinate economic development via strategic development plans (SDPs).
These provide businesses with a more reliable blueprint for investment, in comparison to the patchy delivery of adopted local development plans.
Equally, business has broadly welcomed the prospect of city regions for both Swansea and South East Wales and associated investment in infrastructure.
From a corporate real estate perspective, an urban tendency increasingly tends to influence location decision making; in part due to the importance of human capital and key skills.
New and modern buildings The emerging Admiral buildings in Cardiff and Newport, together with the proposed BBC Wales relocation, all illustrate how first class employers are seeking to create a new productive and collaborative workplace that can attract, and retain, the best talent.
Indeed, the past two years have seen a growing recognition that corporate real estate must be positioned less as a factor of production (a cost to be managed) and more as a facilitator of productivity (an investment that can generate value and advantage).
Those occupiers not thinking in such terms, and there are plenty in Wales occupying secondary and tertiary floorspace, run real risks of constraining their productivity and, ultimately, competitiveness. Over the next few years, there will be increasing attention on refurbishing stock, in part due to the exacting requirements of the 2011 Energy Act.
A return to industrial develop-ment Development will return this year, but not as we know it. The focus will be on demand-led projects, possibly extensions to existing premises or bespoke buildings incorporating key features which cannot be accommodated in second-hand stock.
For example, Viridor's new waste to energy plant in Ocean Park, Cardiff, is so specialised that new build was the only option.
A growth sector will be 'click and collect' units for internet retailers and, in the medium term, 'dark stores' - dedicated warehouse facilities for grocery retailers. Both types of units have been trialled around the M25 and we can expect to see examples in Wales in the coming years.
Residential market dominated by politics Government intervention will continue to represent both the greatest risk, and support, for the housing market in 2014.
The Treasury withdrew Funding for Lending last year, however the most significant (and welcome) reversal was last summer when Carl Sargeant, the Welsh Minister for Housing and Regeneration, rolled back certain sustainability measures. Housebuilders had argued that these measures introduced greater cost on new housing in Wales than in England and contributed to a rapid slowdown in new development.
However, with the introduction of Help to Buy in Wales this month, the politicisation of the housing market is only likely to continue.
Overall, the foundations for recovery are firmly in place and there are signs of increased confidence from both investors and occupiers.
There are more funds and institutional investors looking at Wales whilst nimble regional investors have shown their confidence by moving up the risk curve. The market is changing. The previous stark choice between low yielding grade A investment stock and higher risk secondary markets has blurred.
There is a growing middle ground which will offer strong returns for creative investors who understand the requirements of occupiers.
Meanwhile, in the occupational markets there has been a clear increase in both the quality and quantity of new inquiries, particularly in the advanced engineering, media, food and drink and bioscience sectors.
The provision of new and modern floorspace is now the key challenge for Wales as, without which, we will not attract, or indeed retain, our existing or emerging industries.
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