First, some good news. Compared with 2015’s take-up, Wales benefited from a 9% increase in transactions in 2016, totaling some 4.6m sq ft. Looking at the 5-year average, the figures are similarly healthy, with an overall 8% increase. Clearly, there are opportunities in Wales but there are also clouds on the horizon which threaten the outlook for growth.
Last year, Grade A space accounted for just 4% of total activity and there was only one deal of notable size, namely Amazon’s lease of Unit 1 Celtic Business Park in Llanwern. There is a dearth of supply and 2016 saw a fall of 17% in availability, equating to a rate of just 4.2% across the country. Only 6% of total supply comprised Grade A space, a lower proportion than any other UK region, which reflects a lack of new development during this cycle.
Currently, there is zero Grade A space available above 50,000 sq ft in the market, and it is hoped that the recent letting at Celtic Business Park will provide a catalyst for further speculative development in the area.
At the larger end of the market, occupiers are typically settling for good quality refurbished space, with some often upgrading the properties following acquisition. For example, Aston Martin plans to re-purpose some of the facilities at the 90-acre site in St Athan, transforming the three existing MOD ‘super-hangers’.
This paucity of grade A space has impacted on rents. For example, Cardiff led the growth in secondary rents of 13% in 2016. The capital and Swansea both recorded growth in prime headline rents, rising by 8.2% and 5.3% respectively, while Newport’s prime rent was steady during the year. However, rental levels will need to rise further before developers seriously consider speculative development of larger units.
Speculators were richly rewarded at the smaller end of the market, with two recent multi-let developments in Swansea being entirely let either off plan or during construction.
In fact, in this smaller, sub 15,000 sq ft, market there are good opportunities to create and let space - without the need of a grant - although again, it is likely that rents will need to rise to attract a greater number of developments.
Even with much needed larger 50,000 sq ft space, there is room for a creative approach to ensure that developments become available. Grant aid could be offered in the form of top-up construction costs or rate free periods.
There are many unsatisfied manufacturing and e-commerce retailers seeking this size of accommodation in South West Wales, and take-up in 2017 could be stronger still if the market is better supplied.
However, there are other clouds on the horizon; namely, the rise in the rate of inflation and consumer prices which are expected to weigh on growth during this year. The consensus is pointing to inflation peaking at around 3% during 2017, which is set to outstrip wage increases, and foster caution in consumer spending.
Nevertheless, the proportion of retail sales made online continues to climb. Last year it hit a high of 18.3% and it is expected to rise to 20-25% before it plateaus.
The road ahead may not be without obstacles but demand will continue to be supported by the need for ever more efficient, agile means of servicing customer requirements, from retailers, logistics operators and parcel carriers alike.