Roundtable: Manchester Market Matters

In association with ISG, Place co-hosted a roundtable discussion at the offices of Barclays Corporate in Spinningfields into the state of the Manchester market

In attendance were:

• Paul Unger, editor, Place North West
• Joe Webb, director, ISG
• Chris Swarbrick, corporate director and head of real estate Manchester, Barclays Corporate; David Hardcastle, head of Northern property finance at Barclays Corporate
• Ian Barker, national head of regeneration, Pinsent Masons LLP
• Steve Burne, managing director, AEW Architects
• Damian Masters, development director, GVA
• Phil Meakin, partner, P3 Property Consultants
• Peter Blackmore, senior partner Manchester, McGrigors
• Gavin King, associate, Sheppard Robson
• Nik Puttman, senior development manager, Central Salford
• Lindsey Bayley, senior tax manager, KPMG

The discussion started with a look at the office market. Manchester city centre saw around 1.2m sq ft of office deals transacted in 2010, above the five-year average of between 800,000 sq ft and 1m sq ft, said Phil Meakin of P3 Property Consultants.

This total was slightly skewed by the Co-operative pre-let which is around 300,000 sq ft but in the round Manchester still surpassed the regional cities of the UK in terms of demand.

Meakin added: "There is a two tier market; secondhand space which is the general churn and that continues to see good levels of take-up and then there is the brand new Grade A sector.

"We are in a situation where we've got about 600,000 sq ft of newly built stock and that is probably two years of take-up which takes us to the end of 2012 and then we've run out of stock.

"So I wouldn't say it's a crisis point but there will come a point in time in 2013 that if we don't see any more development then we are going to have a shortage of brand new built stock ready to go and it will then become just a purely pre-let market."

Joe Webb of ISG questioned the amount of inward investment in the office demand figures and Meakin conceded there was very little in the city. He said: "You don't see the inward investors coming into the city in the numbers that you would like. That is perhaps where we need to turn a corner."

Existing occupiers dominate the take-up figures and many have taken advantage of the cheaper stock on the market with three years' rent free standard on leasehold deals these days. Peter Blackmore of McGrigors pointed out his firm was a case in point with their recent relocation to No.1 The Avenue in Spinningfields.

However, Meakin said the tide could turn as space dries up and developers harden up their terms.

Meanwhile, pre-lets are needed to get new developments out of the ground, at prospective schemes such as Greengate at Salford.

Nick Puttman, senior development manager, Central Salford urban regeneration company, explained: "I think the position Ask find itself in is where they've got potentially two blocks there equalling 300,000 sq ft, is actually identifying the pre-let which gives you sufficient take for the funders to be interested. So we're looking at sort of 55-60% pre-let to start on site. There are a few pre-lets out there in the market but there aren't that many."

The level of rent Greengate can attain, being off the prime pitch, is also lower which potentially limits the scheme in banks' eyes.

Similarly, at Chapel Street, the 40-acre English Cities Fund project that is key to the future of Salford, Puttman said demolition is pressing ahead but several sites need to be acquired through compulsory purchase order to bring land back into public ownership.

Given the closure of Central Salford at the end of March will this restrain progress? Puttman: "My understanding of the LEPs is that they are strategic think-tanks and policy vehicles as opposed to delivery vehicles. That said, there is the Regional Growth Fund out there and bids are being invited from both the public and private sector and I think the coalition government have an aspiration that it will be heavily bid for by the private sector but the nature of the bidding process is something that traditionally the public sector has done."

Strong leadership and clear organisation at Greater Manchester's delivery vehicles, such as the Association of Greater Manchester Authorities and the new local enterprise partnership, gave it a good chance of benefiting from the Regional Growth Fund, participants said. They also mentioned the forthcoming Evergreen fund, being set up under the new Jessica programme backed by the European Investment Bank, which will offer development funding.

Damien Masters, development director at GVA, said the public sector would increasingly use its own assets to kick-start development and regeneration. Pension funds such as Greater Manchester Pension Fund, the property arm of which Masters advises, are also becoming more active as they take advantage of having cash while others do not.

Schools are also thinking more flexibly about property needs, with Education Secretary Michael Gove urging school bosses to consider snapping up vacant retail or other types of building while capital spending is frozen.

Gavin King of architects Sheppard Robson said: "We've seen people asking for designs along the so-called 'Woolworths school model'. From an architectural point of view there is no reason why a lot of these spaces can't still act as schools. Schools are just a series of spaces."

Masters cited the sale by Greater Manchester Property Venture Fund of the Kings Point office development to Oldham Council for use as a sixth form college.

Tony Reddin, property tax manager at Grant Thornton, said another emerging trend is developers looking at filling the equity gap in developments through tax efficiencies.

Reddin said: "What we are seeing is people using tax to effectively fill the equity gap left by a lack of bank debt.

"There are things like business premises renovation allowances helping some hotel developments we have seen where equity has been replaced through tax.

"Essentially, if the building is in a disadvantage area, which – admittedly – Manchester isn't, but the outlying regions can be, 100% of the cost of renovating that particular building would be subject to tax."

Less promising, however, is the tax increment finance model being touted by the coalition government, according to Lindsey Bayley, senior tax manager at KPMG. TIF allows councils to fund development through raising finance against future rates that would be generated by the new premises and occupiers.

Bayley and Reddin agreed that local councils are reluctant to have the upfront debt TIF requires on their books.

Bayley said: "Instead, we are seeing joint venture arrangements becoming more and more popular which is interesting because previously where you wouldn't expect two particular parties to enter into a deal, they are now.

"I think people are finding a frustration with a lack of activity and have just been willing to participate in ways they wouldn't have done previously. We appreciate that now 60-65% is probably the maximum bank funding that will be available to bridge the equity gap, can they bring in a landowner to essentially fill that gap? I think that will be more and more complicated."

It was felt around the table that the regeneration bosses of local authorities don't always grasp the logic of the longer term return over 15 to 25 years from schemes like TIF.

Salford was applauded for entering into a number of asset-backed vehicle models – particularly in the residential side.

Joe Webb, director at ISG, added: "There is a new breed of developers coming along who really understand the public sector. Our route into the market is these public-private partnership schemes which are replacing traditional markets."

Steve Burne, managing director of AEW Architects and chairman of the property and construction group at Greater Manchester Chamber of Commerce, was asked if fellow chamber members were positive moving into 2011.

Burne reflected: "Confidence-wise, I think it's slightly better than 2010 although people are still nervous obviously. The private sector is starting to at least get the wheels turning. For example, we've been asked to look at master planning a few sites that we haven't looked at for quite a few years now. So I think people are generally getting ready and that's the message we're getting."

But Burne added: "I think there is still a perception out there that the banks are the bad guys. Regardless of what that situation is, people just think that because they hear it all the time. Nothing will happen until funding is easier and the banks do something."

On the banks' side, David Hardcastle of Barclays Corporate, responded: "In terms of refinancing, there has got to be some shifting of stock out of the Irish and Scottish banks because they just can't hold that level on the balance sheet. If you go back to the 1990s, banks never really moved much property off the balance sheet because once it was on it tended to stay on. The difference this time is that you've got to move it so what we're beginning to see is signs of debt forgiveness or some equity coming in."

Hopefully, despite the indecision in the market these first signs of renewed confidence will continue and the Manchester market can kick on into full recovery.