The success of the Central Square development has been highlighted in these transactions and demonstrates the importance of having new grade A stock available in city centre locations. This is the clear occupier location preference which will consequently drive investment volumes and hopefully attract further inward investment into the city in the future.
Prime yields are currently 5.5% which is a 50 basis point fall from H1 2016. The strong investor interest has resulted in downward pressure on yields. However, this is still a 50 basis point discount from the other main UK regional cities which will mean that Cardiff will continue to be attractive to investors who are seeking exposure to the UK regional office markets. Overseas investors continue to be active in the market which has been highlighted by the Central Square transactions and the overseas interest at Cardiff Waterside.
There is, however, still interest from UK institutions in prime assets in Cardiff. Although they have been outbid by overseas investors who are attracted by the yields which are higher than comparable assets in their domestic markets and the continued weak sterling makes investing in the UK attractive. Cardiff has seen UK Investors also acquiring offices in 2017 such as Fidelity's acquisition of 1 Fusion Point and Boultbee Brooks acquisition of Park House.
After a record year of transactional activity in the occupational market, we expect take-up to fall in 2018 and return to be in line with the long term average. This will be caused by a lack of supply in the market and especially buildings which can accommodate large requirements. Demand in the market is predominantly lease event driven and with most of the larger professional service occupiers signing new leases in recent years it is unlikely that there will be many large private sector requirements this year.
Furthermore we expect limited rental growth in prime rents in 2018, we expect prime rents to remain stable at £25 per sq ft as there is currently no speculative development planned in prime city centre locations. The opportunity for prime rents to increase in the short term will be in a small office suite coming back to the market at Central Square.
A new source of demand in the Cardiff market could potentially originate from the serviced office sector who provide co-working space. These providers have been extremely active in leasing space in the Central London market have started to open new centres in the regional cities as well. These centres have predominantly appealed to start-up businesses from the creative and technology sectors and with the strong tech start-up scene at the Creative Quarter we believe that there would be good interest in this type of space if it was available.
Furthermore, with the BBC locating their Welsh headquarters at Central Square this could potentially create a media cluster with smaller media companies seeking to gain synergies by locating near the BBC. This could provide a good source of demand for co-working space.
We expect UK institutions to continue to be net sellers in the Cardiff market with the focus on securing long term income which was highlighted by Legal & General forward funding 6 Central Square. The institutions will still chase prime offices with potential for rental growth. Overseas investors will continue to be active in the market as we expect strong demand from the sector who are seeking prime assets at attractive yields which the Cardiff market can offer.