2025 will be the year of the real estate pragmatist

The commercial real estate industry stands at a pivotal point. It is my belief that the quality most needed to see us safely and successfully through the coming year will be pragmatism, writes Thomas Pearson of JMW.

First, the positives. Despite the bumps in the road, the 2024 economic journey was better than expected. Driven largely by lower inflation, the Bank of England began its interest rate cutting cycle and although fewer cuts are now expected, the overall trajectory remains downwards. GDP is likely to increase by circa 1% in 2024, within a favourable environment of price stability and falling debt costs.

However we need to caveat all the above by saying that the success of the British economy will likely be impacted by a number of key factors, including uncertainty around trading arrangements with the US, proposed changes to the planning system for housing and development, and, particularly concerning for commercial real estate, a less expansionary budget that doubtless will impact on large scale infrastructure projects.

Having said all that, there is a reason for the North West to look forward to 2025 – the introduction of the integrated settlement.

Integrated settlement for Greater Manchester

This is intended to deliver a single flexible pot of funding with a single outcomes framework to support Mayoral Combined Authorities to deliver growth.

Greater Manchester Mayor Andy Burnham said of the settlement: “This will mean we can now go further and faster, accelerating the growth we are seeing in our economy and the improvements we are making in the lives of our residents.”

I’d like to see these improvements extend to ensuring the delivery of excellent transport links across – and beyond – our region, so that the region’s growing population can move smoothly and economically from home to work, to schools, to social activities, and more.

Manchester has experienced significant population growth over the past 20 years, with the number of inhabitants rising from 422,000 to 600,000. By 2026, 100,000 people are due to live in the city centre, which makes investment into city centre property particularly wise as there will undoubtedly be a concomitant demand from both tenants and buyers. This is going to lead to a particular focus on the buy-to-let market.

Buy-to-let ploughs on

This is a key area of any successful commercial real estate portfolio. According to Deloitte’s Manchester Crane Survey, 2,402 homes were delivered over the last year in Manchester – in line with the number of homes delivered in 2022, but less than half the 5,549 delivered in 2021. Although there are 11,765 properties under construction, some nearing completion, demand looks likely to exceed supply.

Savvy investors know that Manchester consistently achieves rental yields above the UK average of 4.71% and areas like Openshaw, Ordsall, Blackley, and Debdale offer yields of 6.7% or more. Given that approximately 31% of Manchester’s population rents privately it is noteworthy that capital appreciation in the region is also strong.

If you want to shock yourself, look at property prices from a little over 20 years ago. In May 2000, the average house in Manchester was priced at £41,625; today that figure is circa £264,250 – almost six times that of the 2000 average.

The international view

We are an island nation, viewed by international eyes as a safe investment, giving good capital growth, and a decent return on yield. This is understandable when one takes into account the political volatility around the world and the wars in Ukraine and the Middle East. Manchester’s commercial real estate market is a stable one with exceptional growth potential, making it an attractive prospect for overseas investors.

This attractiveness will continue through 2025, although there is no doubt that we need to see real commitment to improved transport links throughout the region if we are to continue to draw the strategic international investor to the region. We must hope that Andy Burnham and the Mayor of West Midlands, Richard Parker, go ahead – with the backing of a private consortium – and create a new Manchester-Birmingham railway line.

The office race

According to JLL’s Manchester Office Market Dynamics Q3 2024 report, quarterly leasing activity was the strongest since Q2 2019, with 432,700 sq ft transacted. The combination of limited supply and a continued post-pandemic return to work – albeit on a hybrid basis – is continuing to drive demand. Although vacancy rates overall continue to climb in the North West’s office market, the race to quality remains unabated. This is potentially one trend that will persist so the market must continue to adapt. Here at JMW we are currently looking for new offices in Manchester of circa 45,000 ft sq, so we’re more than aware of current market conditions.

Pragmatism

We’re no longer facing elevated interest rates nor high inflation and fears of a global recession have largely been dispelled. Ultimately, all the issues outlined above must be met with a measured and pragmatic approach by the industry, because we know that investors remain – rightly – suspicious of speculative projects, particularly the over-leveraged kind, but also remain eager to acquire quality, income-generating assets with long-term growth potential.

There is optimism and there are, as always, opportunities ahead, but our outlook must be tempered by a pragmatic approach. I believe the North West is ready for whatever 2025 will bring.

• Thomas Pearson is head of commercial property at JMW