Why HS2 Doesn't Matter And How Late Is Late Cycle: What We Learned About Birmingham Build-To-Rent
The Birmingham build-to-rent residential sector is buzzing, whilst the build-to-sell sector is racing to keep up with demand from mostly Chinese investors.
But what if the HS2 project is scrapped by a new government? What will give now that land pricing inside the inner ring road has become "outrageous"? And how much time is left before the economic cycle turns once again as it always, always does?
The Bisnow Future of Beds in Birmingham event, held on 20 September at the Library of Birmingham, provided the answers.
Birmingham's city-centre residential market is on a roll. With the city's first build-to-rent schemes due to complete later this year, and continued investor demand pushing the build-to-sell sector, the mood is brisk and confident.
Bisnow assembled a panel of the city's top residential minds to assess the state of the market and the risks it faces. Moderated by Gowling partner Michael O'Shea, the debate included Court Collaboration founder Anthony McCourt, Galliard Homes Director Adam Ratzker and Seven Capital Director Andy Foote.
Their conclusions were that HS2 might not matter, the economy is fine and the suburbs are good.
1. Out Or Up?
Faced with rising city centre land prices, the residential scene has a choice. Does it go out to suburban and city fringe locations, where prices are cheaper? Or does it head up into the skies and emulate Manchester's cluster of skyscrapers?
According to Foote, the answer is to go out, and to do it as soon as possible. “Land prices have gone up, there is a shortage of construction labour, so the only way the market can escape is by raising prices and we could easily price ourselves out of a market," Foote said.
"Until now the focus has been on residential development inside the ring road, but it won’t be long before only investment buyers can afford apartments in that area. We’ve already seen the consequences of this in London [where local buyers are crowded out of the market]. So we need to see development beyond the ring road."
Galliard's Ratzker agreed. "For us it is not about being in the city centre. We’re looking at sites with good access in areas around stations and pushing out of the centre in directions like Highgate, where we’ve acquired a site — so we are keen to explore that out-of-town dynamic. Because city centre land may not be priced competitively we have to look outside the city centre."
However, McCourt was keen to see Birmingham go up. "Birmingham has shied away from tall buildings and some have blamed the planners, but it’s not their fault, I think the city council welcomes height. But the truth is Manchester is way ahead of Birmingham on height," he said.
“We’re working on 44-storey plans for Curzon Street and we have to go up but we also have to go out. There is no doubt there is a bubble in city centre land pricing in Birmingham and in some cases the pricing is outrageous; so we have to go to new areas. We’ve started to look outside the city centre and that includes a large scheme in partnership with the West Midlands Combined authority for a development in another city in the West Midlands."
2. HS2: A Big Deal Or A Big Distraction?
The enabling Act of Parliament has been passed, and every week brings a new swathe of compulsory purchase orders. The HS2 project appears to be moving like a rocket train. Yet not everyone is so sure, with politics and external economic shocks both tipped as potentially fatal hazards for the £56B project which has already seen costs rise by 71% since 2010.
Panelists were unanimous: Birmingham has a lot more to offer than HS2.
“Let’s be clear, the HS2 scheme is in jeopardy, and I would not assume it can’t be canned just because they’ve passed an Act of Parliament," McCourt said, insisting the city would survive the shock.
"HS2 is fantastic for the U.K. but you can already get to London from Birmingham in a hour and 20 minutes and in fact it won't be a big change for Birmingham. It’s more the idea that matters than the reality," Foote said.
"HS2 is important but it isn’t the only thing that matters. There’s the airport, and a young population and retaining university talent, so Birmingham is not reliant on HS2. It’s a factor in investment decisions but if HS2 doesn’t go ahead it is not the be all and end all," Ratzker said.
3. Is This What Late Cycle Looks Like?
What goes up must come down, and that applies to economies as much as to Newton's apple. With Brexit shocks inevitable, worries about the Chinese economy, a trade war being fermented by the U.S. government and the effects of quantitive easing now wearing off, how late in the cycle are we? Should Birmingham's residential sector be on its guard?
"I think the market is at about the half way point," Foote said. "HS2 and the WMCA means it will be sustainable and demand will continue, because nobody wants to see boom and bust."
"It’s a great time to see the glass as half full, not half empty," Ratzker said. "We’re getting more enquiries about our Birmingham pipeline than we are about our London pipeline, which tells you something."
McCourt said there was still scope for growth in residential capital values, now hovering around £450/SF but likely to rise.
"We’re way behind Manchester on the extent of residential supply, but I think demand in Birmingham is better, so we’ve miles to go in this market yet. We have schemes that are 100% funded in China, with 70% sold off plan, and we can’t build quickly enough for investors. The result is we’ll get to £500/SF sales prices quicker than some people think."