As Useful As A Chocolate Cuckoo Clock? Swiss Investors Head To Manchester
As one major Zurich-based private bank steps up its interest in Northern England, Manchester could be in line for a surge in Swiss-managed private wealth.
But Swiss investors have a patchy record of successful acquisitions in a city where competition for prize assets is fierce. And with a scarcity in the kinds of properties at the kinds of prices these investors tend to prefer, the Swiss capital invasion may come to naught.
Watch out, the Swiss are coming. This week it emerged that Swiss private bank Julius Baer is aiming to grow a £20B asset management portfolio with a strong focus on Manchester real estate.
Julius Baer has shown a fantastic capacity to surf the rising markets of post-crash Europe. Assets under management have doubled since 2012 to $400B at the fast-growing wealth management business, thanks in part to the acquisition of Merrill Lynch's international wealth management division.
The Swiss — makers of money, chocolate and cuckoo clocks — have long been players in Manchester real estate. Or would have liked to be, because so far their efforts have not come to much (the bulk of Swiss-badged investment has been for German funds).
Still, the Swiss are becoming increasingly significant among the city's business community.
Baer follow another Zurich-based name into the city. In May 2017, security equipment firm Distrelec signed up for 17K SF of new office space at Mosley Street Ventures/Deutsche Asset Management’s 160K SF 2 St Peter’s Square. It will serve as an expansion of their Zurich innovation hub and is their first venture in the U.K. They chose Manchester after a run-off with Berlin. London didn't figure on the final shortlist.
Credit Suisse Asset Management has been buying and selling regularly in Manchester, albeit mainly for German clients. In recent years it sold its interest in the 180K SF block at 3 Hardman Square, Manchester, to M&G Real Estate. The £91.7M deal came as it wound up its £6.1B CS Euroreal fund. Credit Suisse funds also bought a series of smaller blocks in the £10M to £20M lot size.
What Appeals About Manchester?
Others have been circling the market. Anlagestiftung für Immobilienanlagen im Ausland, a Zurich-based federation of 35 Swiss pension funds, bid for a number of properties in the 2015-2016 season — shortly before Manchester capital values rocketed — but failed to secure anything at that time. They have been reported to be keeping a watching brief of £20M to £80M lots in the prime city centre market.
Swiss investors are unlikely to be deterred by the rise in Manchester capital values since 2015-16 since that has largely been matched by a rise in occupier take-up, now surging toward 1.5M SF in the city centre. According to Cushman & Wakefield's Fair Value Index, Manchester is rated at 5.9 and underpriced (a sharp change from the fair priced valuation in late 2017). That makes the city a more appealing location for Northern investment than Leeds, where Cushman & Wakefield judge prices to be fair with a rating of 4.5. Both are significantly better value than London. Berlin, Hamburg and Frankfurt are perhaps the best value underperforming locations — and Julius Baer's strategy embraces investment in just two key areas, Germany and the North of England.
The difficulty for Swiss investors is that they are not alone in spotting Manchester's potential. There are legions of other international investors and many of them — Germans in particular — are slightly more attuned to the scale of risks and opportunities in U.K. regional cities outside of London. Whilst Swiss investors tend to concentrate on prime office stock, German investors have grabbed a variety of opportunities, such as the December sale of the Debenhams retail block at Market Street. The 470K SF building was acquired for £87M by Munich-based private office AM Alpha at a yield close to 5%.
The Swiss investors' dilemma is that they are under a powerful local impetus to invest abroad (thanks to the strength of the Swiss franc and low domestic interest rates) at the same time as caution prevents them making the best of the buying opportunity.
“I think we will see more Swiss cash buying in Manchester and the U.K. given their negative interest rates. Investors are effectively being charged to hold money," Carrick Real Estate Director Steve Carrick said. “I don’t think it is a case of Swiss replacing investors but more like joining the queue!”
Searching For Size
The best Swiss option might be to look elsewhere in the North. If Swiss funds want newly built prime office floorspace, then maybe Leeds offers rich pickings? According to LSH Office Pulse data, just 106K SF of new Grade A floorspace was occupied in Leeds in the second quarter of 2018, roughly in line with the five-year average. New floorspace under construction in the traditional office core totals just 66K SF, with nothing under construction in the flourishing Southbank district.
There are relatively few lots in the sweet £20M to £50M range, the most recent being Barings Real Estate's £42.7M loan secured against the 145K SF Pinnacle, which includes 75K SF offices on the upper floors of a 19-storey mixed-use tower. The property was acquired by a fund advised by Brockton Capital in April. The three-year facility represents a loan to value of 65%.
Leeds has plenty of appeal to investors who want to buy into an apparently constrained market, but liquidity is often more important, and that is what Manchester's much larger market has to offer. North West investment volumes in the first half of 2018 hit £1.4B, according to Lambert Smith Hampton’s latest U.K. Investment Transactions report. Office market transactions, predominantly in Manchester, accounted for 31% of the deals in the second quarter, though even in Manchester few reached the sizes that Swiss investors are said to prefer.
“At the half year point the North West was performing well and certainly better than the same period last year, but we must temper the story a little, as some very sizeable deals in quarter one are largely responsible for this," LSH Capital Markets Director Ben Roberts said. "Quarter two is a more accurate reflection of where the market is at and, with squeezed stock levels and downward pressure on yields continuing, stock selection will continue to be very important for investors."
Tempted to look at Manchester by the prospect of undervalued property of a kind rarely available in Europe (outside of Germany) and attracted by the large liquid market, Swiss investors are keen to buy. But with a modest record of purchases to their credit, a preference for the strictly limited stock of top quality office blocks and aggressive competition from others, their chances of successful dealmaking are limited.
If the Swiss are on their way to Manchester, they had better be prepared to operate with elbows of Toblerone sharpness to make progress in a competitive market.