Land tax could see commercial property deals dwindle in Wales
Commercial office lettings in south Wales, where Cardiff remains the main driver of deals, will ease off this year following a very strong 2017, according to latest analysis by property advisory firm Cushman & Wakefield.
Its Cardiff Property Outlook Report show that while Newport and Swansea were behind their five-year averages on office deals last year, Cardiff has an exceptional year – boosted by the biggest-ever office letting deal in Wales with HMRC signing up to the 270,000 sq ft 6 Central Square office scheme in the centre of Cardiff as part of a new UK Government public sector hub.
And the report says that while the first three months of this year have been positive for commercial property investment deals, it predicts the market will be negatively affected by the Welsh Government’s new rate of tax on deals above £1m, which was introduced in April as part of the new Land Transaction Tax.
The tax replaced the former nondevolved stamp duty rates of tax on residential and commercial properties. At 6% (rate on non-residential property deals over £1m), it is higher than in both England and Scotland – and at a level which many leading figures in the Welsh commercial property sector said will only deter investment into Wales.
Rob Ladd, partner in logistics and industrial at the Cardiff office of Cushman and Wakefield, said that 2017 had been a strong year for the region’s office market, with take-up reaching 850,000 sq ft, underpinned by Wales’ largest-ever single office deal – the HMRC deal at Rightacres’ Central Square scheme in the centre of Cardiff.
Central Square contributed half of the 700,000 sq ft of transactions in the capital. However, while there is new stock in the pipeline, including at JR Smart’s Capital Quarter scheme in the centre of Cardiff, where the under-construction 3 and 4 Capital Quarter office schemes will have provided a further 170,000 sq ft of space by next year, Cushman & Wakefield said there is currently only 100,000 sq ft of Grade A space available. And at current take-up rates, this represents less than six months’ supply.
Mr Ladd said: “Cardiff remains a very competitive location and good value for money. However, with several active requirements in the market, we expect this level of availability to drop further in coming months. As a result, we expect take-up will be below 500,000 sq ft in 2018 for the first time since 2013.”
The industrial market also witnessed a strong year, with 20 separate deals over 50,000 sq ft totalling 2.8 million sq ft. South Wales also had the highest growth in prime rents across the UK at 9.7%
Mr Ladd said: “Whilst we have seen a significant increase in e-tailing and logistics, manufacturing continues to be where Wales has seen the strongest demand. However, there is a lack of quality buildings able to meet modern requirements.
“Due to this, we expect to see reduced industrial volumes transacted during 2018. Despite this, there is still no significant speculative development and a lack of sites immediately available for bespoke units. Compare this with Bristol, where there is 1.5 million sq ft of speculative development either built or in the pipeline only 35 miles from Cardiff.
“The challenge now is to ensure Wales can offer serviced sites and modern buildings.
“The removal of the Severn Bridge toll is a welcome announcement, but without the supply of serviced land and buildings that are fit for purpose, the removal of the tolls will mean companies may have to look outside of Wales in the future.”
The investment market saw deals totalling £910m in Wales last year – the second-highest figure ever achieved. This high level of investment was boosted significantly by three major funding deals in Cardiff, with HMRC at Central Square, 2 Central Square and Premier Inn Custom House, that achieved the lowest yield for a Premier Inn funding in the UK outside of London.
Andrew Gibson, partner in investment at the Cardiff office of Cushman and Wakefield, said: “The occupier markets have continued to support an excellent growth story within the major conurbations in Wales, making the region very attractive to institutional funds, national property companies and, of note, foreign capital which, apart from the Americas, saw an increase in spending in the UK in 2017 from 2016.”
In total, 90 commercial investment deals were completed in 2017, with 63 between £1m and £10m and 15 over £10m.
Despite the investment levels of last year, Mr Gibson was cautious about the outlook for 2018.
He said: “The introduction of Land Transaction Tax in Wales accelerated completions in Q1 2018, driving volumes to £350m.
“This is likely to slow for the remainder of 2018 as Wales will now look less attractive to the fund analysts in comparison to other UK regional centres, due to the direct and sentimental effects of LTT.
“As such, despite the general environment for investment across the UK remaining as positive as last year, this barrier to investment in Wales means I don’t believe volumes will exceed the 10-year average of £655m.”
Mr Gibson said that a positive trend emerging was an appetite by leading institutional investors, such as L&G, to forward-fund commercial schemes in Cardiff.