Why This U.S. Investor Can't Wait To Get Developing In Manchester
The North West attracted just short of £1B in property investment in the first quarter, with the vast bulk coming to Manchester.
Can Manchester hang on to its share of capital inflows in a market dominated by U.S. investors, who accounted for 24% of property investment in the U.K. in Q1?
North West investment volumes were more than double the £440M figure for the same quarter in 2017, according to Lambert Smith Hampton’s latest U.K. Investment Transactions report.
It is no surprise to Leonard. Houston-based global investor Hines has a presence in Manchester through the 264K SF Royal Exchange office and retail complex, which it bought for £85M from Connecticut-based Starwood and partner Trinity IM in 2016. Their German co-investor is Universal Investment.
Nationally, U.S. investors were the biggest overseas investors into U.K. real estate, and if it could, Hines would have contributed to boosting that figure in Manchester.
“We absolutely would love to get into new build in Manchester," Leonard said, stressing the firm's desire to re-enter the city's speculative office market after its exit in 2017.
If anything is holding Manchester back it is the global perception of risk, not local factors, Leonard said.
“I think there is a lot of interest from the U.S. and elsewhere. We are constantly talking to investors who are interested, but look three years out and I see a lot of concern about what the world will look like then, even though the fundamentals in Manchester’s office market look perfect," he said.
Royal Exchange: A 10 Year Play?
The Royal Exchange presents Hines with some interesting puzzles and opportunities. Originally a 10-year investment play, the eventual exit time table is still up for debate between Hines and its co-investor. "It might be 10 years, it might be 20," Leonard said.
Leonard confessed that some of the 81K SF of retail floorspace — including the Arcade and the main street frontages — has yet to find its level. More upscale and independent retailers are required, he said.
“It’s not clear yet what is fashion, and what is here to stay, but one thing is certain and that is that the relationship between landlord and tenant has changed completely,” Leonard said, agreeing that to an extent every Manchester landlord is being forced to act like a coworking landlord by being infinitely flexible and attentive.
“We’d consider offering a coworking platform ourselves — most big landlords are thinking about it," Leonard said. "At the Royal Exchange we have 17K SF in the South Block, all smaller rooms let on short leases. We’re going to refurbish that space, creating more meeting rooms and breakout spaces, and offer very straightforward flexible deals to one to five-person businesses, so we hope that will meet the coworking need.”
Spectulative Development: Squeezed Out?
From 2013 to 2017 they had control of the 178K SF Landmark office development site, part of the flourishing St Peter's Square office cluster. But that year it surrendered its interest to Barings, which is now at work on a speculative office scheme due for completion in August 2019. At the time it was reported Hines thought it was not the right time in the cycle to speculatively develop — and Leonard still has his doubts — but a slice of the Manchester office market action is something the business very much wants.
"It is a disappointment we couldn't make Landmark work for us," Leonard said.
“You have to have deep pockets and be brave to do speculative development in Manchester, and we’re looking but we have nothing advanced. We’d love to get into this market but it’s challenging because of the prices you have to pay.”
Is Manchester such a competitive market that even superbly well-funded U.S. investors struggle to claim a slice? "Manchester is in a great position, look at the quality of recent office developments, it's really high," Leonard said. "We bring investors to Manchester all the time and if you can work out how a city feels the moment you arrive, that's a superficial but hugely important thing, which some rival cities do not have.
"We get off the train at Piccadilly and they immediately know where they are, and it's always a great experience. You know investors will like it. But beware, other cities are catching up."
That is a warning everyone in Manchester will understand.