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Manchester, the English city that gave the world Manchester United Football Club, split the atom and invented the screw thread, is a boomtown. Its phenomenal economic growth rate puts most of Europe to shame.

Yet real estate investors love it because it feels safe. Whilst the European Union grows at 1.2% to 1.4% a year, and the UK by 1.7%, Manchester grows by that much each quarter (and some parts of the city appreciably faster). Official data lags behind economic reality, which is assumed to be a fairly steady 5% to 7% GVA growth annually, according to the Centre for Economics and Business Research.

The rate of business formation, and rate of growth of existing businesses are way above the national trend, largely thanks to the tech sector. It is no surprise that the property business has been moving in fast.

City tower, piccadilly
City Tower, Piccadilly, Manchester, look south west

Is Manchester that strange thing, a defensive play that is also a red-hot prospect? A home for patient capital and at the same time the scene of a gold rush? In the past five years, the city has burst on to the radar of overseas investors, and become one of the UK cities domestic institutions still favour. Like every boomtown, it has its detractors and its challenges, but Manchester remains a city success story others around the world are looking to as an example, and global real estate is taking note.

Data from Deloitte Real Estate in the UK, and from Rider Levett Bucknall in the U.S., show Manchester has more skyscraper development than any North American city except Toronto.

Manchester's tower crane count reached a record 64 last summer, and the skyline is still dominated by the 50-storey plus skysrapers that they are building.

Much of this is paid for with overseas money. Total volumes of international capital diverting to Manchester are hard to judge. Residential apartment sales in the Far East are almost impossible to quantify, but developers still beat a path to Singapore and Hong Kong with new schemes for sale. Global investment into commercial property is much easier to measure, and paints a picture of success.

Exclusive research for Bisnow by Savills shows the tip of a very large iceberg of overseas investment in the city by analysing overseas interest in the commercial property sector.

Just shy of £2B was invested by overseas buyers in commercial property in the conurbation's central districts 2015-2019, Savills said. It compares to just £877M in the previous five year period. The medium-term average suggests 25% of the total investment spending comes from overseas, but in some years it is much higher — up to 52% in 2016, before the Brexit crisis choked off spending.

European investors account for 40% of overseas spending, North American investors 24% and Far Eastern 19%, but it is the North American investment (more than doubling compared to the previous five years) and the Far Eastern investment (which did not exist before 2015) which showed the fastest growth.

"The volume of overseas capital coming to Manchester is rising steeply, year by year," Savills Investment Director Oliver Foster said. "Volumes grew 145% between 2015 and 2019, compared to the previous five years, so there's a sharply growing trend."

The Savills research raises three questions. Is Manchester’s property market about to surf Brexit disruption, or to be overwhelmed by it? How far is investment in Manchester a gold rush trip to the wild (North) West? Or is Manchester, as many UK funds argue, the ultimate safe bet?

Office Investment: The Safe Bet

Grade II-listed Hanover Building,  Corporation Street, Manchester - part of the NOMA project developed by Hermes
Amazon's nerw Manchester office in collaboration with WeWork: The Grade II-listed Hanover Building, Corporation Street, Manchester

These are uncertain times, thanks not just to Brexit but also to the rising risks of a China-U.S. trade war, of something nasty undermining the Chinese economy, of gravity finally hitting global asset prices, and of an economic cycle close to its end. Why risk investing in a boomtown when the obvious play is a safe one somewhere else?

This is the Manchester office market’s strong card, according to those who watch its markets most closely, who say Manchester is a defensive play. Compared to roller-coaster London, Manchester is a smooth ride. And unlike other UK regional cities, it is a large, liquid market.

First, some numbers. Manchester's office market is comfortably the biggest outside London, it terms of volume and value. Total take-up in 2018 was 2.9M SF, of which 1.75M SF was in the city centre. Top rents are around £35 to £37 per SF, and yields hover a little over 4%.

“If you are investing for the first time in the UK, of course you go to London. But once you are comfortable, you look at the regions, and the first port of call is Manchester,” Savills’ Foster said.

The key evidence comes from UK’s pension and insurance funds, patient capital that seeks long-term returns and does not enjoy surprises. UK institutional investors are rethinking their UK regional investment strategy. Each has a different approach but the core is a decision to invest heavily in a handful of key cities with the aim of creating a mutually reinforcing portfolio (the office investment supports demand for the residential investments which support the shops, and hence the warehouse investments).

The outcome should be a sustainable, long-term play which yields returns in a rapidly changing world because the cities in which they have invested are those mostly likely to make it successfully through the many challenges the UK economy will face. You can read a longer analysis here.

Legal & General and Aviva have both signalled this strategy, buying into office blocks, build-to-rent multifamily apartments and modern warehousing in Manchester. This month M&G Real Estate named Manchester its second most 'vital' city for real estate investment, behind Edinburgh.

In Aviva’s case, Manchester is one of four favoured locations along with London, Cambridge and Birmingham.

Schroders Real Estate are recent big buyers in Manchester, and it is likely to buy again.

In 2014, just as the Manchester boom was finding its feet, it paid £132M, reflecting a net initial yield of 7%, for the 615K SF 30-storey City Tower at  Piccadilly, Manchester. In 2017 they paid around £200M, a yield of 5%, for the 300K SF office block at No 1 Spinningfield.

“We have a strategy of investing in winning cities. Manchester is clearly on our list of winning cities,” Schroder Real Estate Investment Manager Rob Cosslett said.

“There’s good economic growth, based on a strong university sector and high talent retention, affordable housing for that talent close to the centre of town, an active and engaged local council and lots of visitors, not just because of the football clubs Manchester City and Manchester United, but because this is a city with plenty of culture and a great sense of place.”

Schroders has seen rapid rental growth since acquiring City Tower, and are now tweaking the amenity offer hoping to set off a second phase of growth. The appraisal is based on rental uplift of 5% to 7%.

Yes, Brexit has hurt the office market Cosslett said, but investing in Manchester offices is the opposite of a risk. Amazon recently signed up for a 90K SF base, its only regional HQ outside London, and the list of  2019 deals is a long one, despite a year in which Brexit took its toll.

First half take-up was 1.2M SF, with demand kangerooing up and down as various Brexit deadlines came and went. By the end of the year the total will be close to 2018's 2.8M SF thanks to strong demand, with around 1M SF of known requirements currently in the market and expected to land before Christmas. These are roughly split between growth in indigenous companies and new arrivals from London.

“This year we’ve seen more caution from tenants, which is probably due to Brexit. We’ve seen longer viewing lists than we’ve ever had before, but the viewings do not turn into deals. Many occupiers are pausing decisions,” Cosslett says.

“Of course there are risks everywhere, but we think they are minimised in Manchester. The sheer willingness of London corporates to relocate here is proof on its own, add the city’s tech excellence, and unlike London the affordable rents, from £35-37 per SF down to £15-20 per SF, and it’s a great place for business to grow.”

The Brexit Effect

Salford manchester offices
101 Embankment (right)

Brexit is a conundrum that gets more twisted every day. This week has seen the deadline for Brexit extended until a provisional 31 January, and the prospect of a 9 December general election raised.

No sane person would guess how Brexit ends yet for Manchester property, but a relatively straightforward thesis goes like this: the uncertainty has hurt inward flows of capital, and any kind of resolution (in, out or shake it all about) will probably turn the investment tap back on.

“Look at the medium term totals for international investment, and you can see everything goes steadily up until Brexit begins to bite, then it turns down," Foster said. "That is certainly due to Brexit and the political turmoil that goes with it. Yes, rapid growth means we rapidly run out of stock to sell, which chokes off the market sometimes, but only Brexit fully explains why overseas capital going into Manchester offices should be over £1B for two years, then slide."

Savills data showed the dramatic fall-off. In 2015 and 2016 overseas capital accounted for 42% and 52% respectively of the total volume of property deals in Manchester (and a staggering 55% and 69% in the office sector, which has long been dominated by international money).

In 2017, the year of an inconclusive general election, volumes plunged to 26%, sliding even further to 16% as Brexit chaos took hold in 2018. So far 2019 has seen a slight improvement to 23%, but this is way below the pre-Brexit peak. Foster guessed some of that slight uptick is caused by overseas buyers watching sterling fall under Brexit pressure, and deciding now is a good moment to buy at a discount.

“Without Brexit we’d be seeing international money accounting for 50% or more of the Manchester investment scene. The overseas element would have been maintained or improved,” said Foster, predicting that it will rapidly bounce back once the Brexit process has definitely happened, definitely not happened or definitively stalled.

Residential: The Complicated Option

October 2019
Towers sprouting on Manchester's south-western fringe

So much for the long-term stability of the Manchester office market, but how do the boomtown’s many residential skyscrapers rate? Good bets or big risks?

Official population projections show the extent of the opportunity for city centre residential. Manchester has dramatically reversed its previous downward trend in city population, up 28% 2001-2011, and projected to grow by another 29% 2011-2025. Greater Manchester (which includes the city and its nine neighbouring boroughs) is also rising fast against the trend.

More dramatically, the population of the five city centre wards is expected to grow by 25% in the years to 2025, and by 41% to 2030. Three of those wards will grow much faster: Deansgate (63%), Arwich (62%) and Piccadilly (61%), boosted in Piccadilly's case by the mighty Portugal Street East scheme. These are the wards (along with a handful in neighbouring Salford) where much of the skyscraper residential development is concentrated.

Gavin Taylor is executive director at Far East Consortium, the Hong Kong-listed developer with a £4.8B portfolio and commercial ventures operating across Mainland China, Hong Kong, Singapore, Malaysia, Australia and New Zealand. It is to develop Manchester’s £1B Northern Gateway residential scheme on the northern fringe of the city centre. It will yield 15,000 new homes.

Taylor’s view is that capital isn’t so much diverting from London, as finding the path of least resistance in Manchester.

“For us, this is less a diversion to Manchester than an aggressive search for opportunities," Taylor said. "We want to add value when we develop, and that is very hard in London. But in Manchester you can add value through planning, and by taking risks, and you get the bonus of capital values growing faster than they do in London.”

FEC has a clear mandate: buy land which enables a residential purchase cost of less than £20K per unit. That figure is more or less unattainable in London. It plans on development profits of 20% to 25%, lower than London but without London’s risks or high entry prices.

That is not to say Manchester is without risk, but according to Taylor that risk is the self-inflicted one of not properly understanding the city’s character or market.

“So often in Manchester you can’t put a number on things," he said. "There is no quantitative measure that will tell you what you need to know, and if you put an investment here on a pure risk metric it would probably scare you shitless and your board would never let you invest. The answer is to know how the ground lies, to know people in the city, what works here and what doesn’t.”

Scott Griffiths is director at BTR developer Glenbrook, and is advising a host of midsized U.S. investors on their Manchester residential sector debuts. One likes lots of £6M, another £30M plus, a third is happy to spend £50M a year.

“They can get the kinds of returns they want here. Double-digit returns are still possible, though it is getting harder,” Griffiths said.

“Manchester is firmly in Europe’s top tier,” Griffith said, discounting global cities like London and Paris. “We’re up there with Dublin, Munich, places like that, because you have a real offer here at a fraction the cost of investing in London.”

The rapid expansion of Manchester’s city centre residential market has unsettled some observers as Lambert Smith Hampton national head of build-to-rent and private rented housing Ian Scott explained.

“The land market got hot too quickly, now it has cooled, fortunately most of the stock we’re seeing delivered today is on land bought before prices shot up, they didn’t pay top dollar, but the viabilities get trickier if your bought land more recently. The profit margin is narrower, if your unit cost gets nearer £25K,” he said.

Even so, Scott said BTR developers are happy. Standard appraisals suggested units letting at the rate of 10 to 15 a month on most midsized schemes. The absorption rate is closer to 27 units a month, he said. Many schemes launched this spring are, by October 2019, all but fully occupied.

Residential rental prospects have taken a beating from the surge in new supply, down from an annual rate of growth of 7% to 8% (even 10% a year in some case)  to a more modest 1.5% to 2%. But the slowdown in land sales, and hence development, will squeeze supply sharply in the coming years. Official projections that another 35,000 residents will move into the city centre by 2025 suggests to Scott that demand, and hence rental growth, is set to resume.

Manchester: Still Too Small For Big Money?

October 2019
New Manchester rising behind old industrial Manchester

Not every international investor is overwhelmed by Manchester’s potential. Oxford Properties, the giant Toronto-based pension-fund backed investor, is one of those who is not overly excited.

Henry Shearer is head of UK at Oxford Properties, and he’s struggling (as is everyone else) to find London sites to refresh his development pipeline.

So, what happens if Oxford cannot find sites in London that offer the right mix of price and risk? Rather than heading to Manchester (the solution preferred by many boxed-in London investors), it will be deploying capital to Berlin, Australia, Singapore and elsewhere in Asia.

“We’re into global gateway cities,” Shearer said. “We’re highly focused. We don’t have any UK investments outside central London, and we’re not looking to buy any. We see our growth coming from global not regional cities,” he said.

Manchester’s relatively low lot sizes explain some of the reluctance. Shearer would prefer lots of £200M plus, big for Manchester. But in the end, Oxford’s view is that Manchester just doesn’t cut the mustard.

Savills’ Foster suggested this is a minority view.

“Yes, Manchester lot sizes are small by international standards, but £100M-plus is not uncommon and that suits European investors who have been investing heavily, up 30% over five years," he said. "They can see top rents of £37 per SF, higher than any other UK regional city, with the prospect of more growth to come. And they can also see developers who are not finished yet, and who still have business plans to implement."

Foster is advising on the disposal of a mixed portfolio of assets around Manchester airport (the UK’s third busiest after London Heathrow and London Gatwick). Seven serious bids suggests that on this sale alone £3.5B worth of predominantly overseas funding is seeking a home in the city’s property market. Columbia Threadneedle is preferred bidder to buy the portfolio, backed with money from private clients of Citigroup, according to React News. Joint ventures between Starwood and Ares and Brookfield, Cerberus and Arrow Capital were also among the bidders.

Manchester will not be every investor's ideal location. But if it can please both those who have an appetite for risk, and those who don't, and offer each of them the prospect of growth, it is sure to attract overseas attention.