Last year marked another record year for investment into the UK property market. Some £26.1 bn was invested in UK offices during 2015, the highest annual total in 8 years. However, investment in Central London failed to match the high of 2014, falling 4% short of the previous year.
As well, in response to the Brexit vote, the LSH latest quarterly UK Investment Transaction Report predicts that the market uncertainty generated will lead to an 11% fall in capital values by the end of 2016. With London values stretched across a number of sectors pre-Brexit, an adjustment was required and the results of the referendum have arguably accelerated the process.
The fall in property values, coupled with the devaluation of sterling and the swift appointment of a new Prime Minister, is making UK property an attractive proposition to overseas investors. We expect them to be active buyers throughout the second half of 2016 with British-based institutional investors set to be net sellers for the remainder of the year which will create an active market place.
There will be winners and losers from this, with prime, well-let properties across all sectors holding up well and with secondary and tertiary assets in more exposed sectors seeing the greatest price adjustments.
It is predicted that the regions will outperform London across most sectors in the short to medium term both in regard to investment and development until the market has a clearer understanding of the UK capital’s future outside the EU.
Office space within Central London’s core markets has always commanded a significant cost premium over elsewhere in the UK. However, more recently, this premium has become substantial on the back of strong rental growth throughout the capital.
Looking at the figures, the current cost of occupying a new-build office development in London’s Midtown - including net effective rent, business rates and all day-to-day running costs - is approximately £120 per sq ft per annum. That is double what it costs in Cardiff.
As significant as occupier costs are to a business, they pale in comparison with staff costs. As a general rule, staff costs in a brand new building usually account for around three quarters of a business’ expenditure.
Our analysis reveals that current staff costs (based on average local salaries in the upper quartile of earners), together with prevailing occupier costs for a new-build office, amount to an overall annual cost of just over £50,000 per workstation. Measured on the same basis, a workstation in London Midtown carries an annual cost of over £80,000.
Viewed in less abstract terms, the current overall cost of a new-build office of 50,000 sq ft stands at £27m (based on standard density of 100 sq ft per workstation) including staff costs. Over a period of five years, the effective ‘saving’ from being located in Cardiff instead of being located in London’s Midtown amounts to a sizeable £68m.
London-based office workers may command higher salaries than their regional counterparts, but for the majority, this is more than offset by the eye-watering cost of housing.
In today’s market, the average cost of a house in London’s inner boroughs stands at almost ten times the average combined salary of a cohabiting couple, compared to three times the average in Cardiff.
Recent research by Lambert Smith Hampton’s sister company, Hampton’s International, found that an average couple needs to save for eight years to afford a deposit in London, at least three times as long as it takes in the UK’s other regions.
And housing matters. According to a recent UK survey by Yorkshire Building Society, people aged between 18 and 40 rank ‘getting on the property ladder’ as more important in life than marriage, children or advancing in their career.
So where does Cardiff stand?
Cardiff stands at the heart of a city region of 1.4m people, just under half of Wales’ total population and is one of the country’s fastest growing cities. The city has not “over heated” in terms of property and operational costs whereas growth in London post 2011 has been excessive, and with the result of the EU referendum the adjustment has been profound.
Cardiff has also experienced steady but by no means excessive investment and development activity over the same period. This has provided a supply/demand equilibrium facilitating future continued growth opportunities for both businesses and investors alike, whilst London has seen an accelerated “value adjustment” following the referendum. It’s likely its future will remain uncertain until the details of Brexit are fully known.
Finally the benefits of a lower cost of living and a better quality of life in Cardiff would seem to outweigh those available in London, with affordable housing costs for young workers offsetting the higher salaries achievable in London.
With continued regional growth, business and investment opportunity, a good quality of life in a modern progressive city, it is Cardiff that would appear to have the Capital Advantage.