Welcome to The Subplot, your regular slice of commentary on the North West business and property market from Place North West.
- The earth moves in Little Hulton: parcel depots and last-mile logistics sites are the hottest properties in the North West. Is the market in danger of overheating?
- Six acres of empty offices at Salford Embankment: will flexible workspace help fill city centre blocks? Yes, but not every landlord can expect to be rescued.
- Salford’s secret millionaire: the shy but canny investor behind the £350m Great Jackson Street skyscraper plan. Subplot explores his pivot from retail to residential.
THE KINGDOM OF CARDBOARD
The super-hot market for parcel depots
A below-the-radar Salford deal, agreed last week, shows private equity is piling into North West last-mile logistics. Is this a classic property bubble, or simply the new normal?
You may not have felt the earth move, but last week the tidal wave of international capital flowed through Little Hulton. The newly built 172,000 sq ft Raven Locks last-mile logistics scheme, developed by Network Space, was sold as part of a £250m, 2.2m sq ft pan-European deal. Sites like Raven Locks are the final stage in the e-commerce supply chain, and as e-commerce has boomed (peaking at 36% of sales in December), so has demand for urban logistics property.
Raven Locks was sold by Network Space’s funding partner InfraRed Capital Partners to US-based investor Blackstone’s (insatiable) Mileway urban logistics platform. With tenants lining up, work on site completing, and Mileway pretty much in the market to buy anything solid, this was a low-risk moment for InfraRed to take a profit. But behind this deal sits a bigger and more complicated picture. There are icebergs to navigate around, as revealed by Subplot‘s exclusive chat with InfraRed and fellow specialist investor, Warehouse REIT.
The first problem is North American money. Global alternative investment giant Blackstone’s “high conviction” decision to divert funds from big boxes to last-mile in 2018/19 poured $6bn into the sector. This sucked a lot of smaller players into the market on the assumption that if proverbially ahead-of-the-game Blackstone is betting big, then so should everyone else. Also, Blackstone is paying top prices, and pricing signals from big private equity players are hard to ignore. Andreas Katsaros, fund manager at InfraRed and the man behind the Raven sale, says: “Blackstone’s move from big box to last-mile probably prompted an influx of capital from the US and Canada, and some Asian investors. I suppose some investors may have seen this as an endorsement of that part of the market.”
But does the Blackstone effect mean the market is a bubble? Katsaros thinks not. “No doubt, there is hype in the last-mile logistics market, and a lot of competition, but compared to other property sectors at the moment which all have their own set of challenges, well-located warehouses, particularly in urban fringe areas, will likely continue to benefit from lack of land supply and sustained demand,” he says. Put this another way, a Salford parcels depot with a 5% yield feels a lot safer than a Salford office block with a 4% yield, given that nobody knows if anyone wants to work in the office block any more (scroll down for more on this).
Can the tenants afford it?
Parcel businesses are notoriously low-margin. The obvious peril is that investors demand returns that require unaffordable and growing rents of £7/sq ft or above. Investors are not blind to this risk. Andrew Bird, managing director of Warehouse REIT, says: “We’re constantly trying to establish our tenants’ turnover and profit margins, because it’s all very well saying ‘demand for last-mile units outstrips supply’, but the tenants have to actually be able to pay the rent.”
There are two other trip hazards. The first is that online sales growth flattens and this takes the energy out of the property market. Katsaros says: “At some point growth in online sales has to flatten,” he says. “Nobody knows exactly how many years it will be before it plateaus, but it has to happen eventually. The question is whether it is two or three or six years away. Our view is that we haven’t yet reached a peak – while we’ve sold this portfolio of assets, we continue to invest in last-mile assets both through our buy-and-hold urban logistics fund, and also our value add fund.”
The second hazard is that the Government begins to clamp down on sustainability in the urban logistics sector. This means dealing with all those diesel-powered vans, obviously, but also asking questions about mountains of single-use cardboard. This is no joke: parcel delivery has reached such epic proportions that there have been shortages and cost hikes to the point that old corrugated card, used to make the new stuff, shot up in price by 25% between December 2020 and February 2021.
“The focus on the sustainability agenda suggests the last-mile market has a lot of evolution to go through, and that may increase costs for operators,” says Warehouse REIT’s Andrew Bird, adding that he doesn’t think those costs will feed through in a way that hurts investors. InfraRed’s Andreas Katsaros agrees. “There’s a lot of profitability in the overall e-commerce market, so if the question is ‘can the supply chain take any future regulation that increases costs’, yes it should be able to. Whether it is the parcel carriers or Amazon or somebody else who takes the cost, we will have to see, but increasing costs will have to be absorbed by the supply chain overall.”
But don’t worry
There are also forces that tip the market towards stability. One is the difficult mathematics of multi-unit small-shed development (particularly the risk of expensive void periods). This imposes a lid on development, and so long as there is a lid on supply, and demand remains constant, investors think the property market can’t go far wrong. Of course, if all that private equity money results in developers not having to worry so much about void periods and the development floodgates open, there will be problems.
Calling the top
Nobody is calling the top of the market, and nobody is taking their chips off the table. That said, everyone is being watchful. Bird says: “We think rental growth is with us for the foreseeable future. I don’t see this as a classic property cycle with a peak.”
More to come
There will be more big-number last-mile logistics buys (and sells) in the North West. In particular, keep your eyes on Merseyside where values have some growing to do. InfraRed owns the 826,000 sq ft Triumph Business Park in Speke, and is in the midst of a £15m expansion and improvement. InfraRed intends to wait a little for local markets to lift. The newly created Liverpool Freeport plays a role in its calculations. “We’re still in the middle of investing in this estate. We are a big believer in the potential of the Port of Liverpool and industrial assets in the area will benefit from its growth,” Katsaros says.
Conclusion: North West last-mile logistics is hot and getting hotter. But clever investors expect a modest cooling.
DRIVING THE WEEK
The big flex workspace gamble
Flexible workspace operator Spacemade is the latest to target Manchester. It is mulling a 15,000 sq ft -25,000 sq ft debut suite. But flex sector growth can’t rescue everyone with an empty offfice block to fill.
Spacemade claims to be a first-of-its-kind consultancy-slash-operational partner for building owners that want to provide a bespoke flexible workspace offer. Launched in 2019, Spacemade operates seven buildings amounting to 100,000 sq ft of office space across London, Leeds and Bristol. Soon it can add Manchester too.
Meeting a need
Jonny Rosenblatt, chief executive of Spacemade (some will remember him from similar-but-different Headspace), says his business thrives on the current uncertain mood. “Change encourages us, our model revolves around accelerated change. It actually increases opportunity for us,” he says. If Spacemade’s arrival is delayed, it will be because “micro-location is everything in Manchester,” adds Rossenblatt. “It is important we get the site bang on, so we won’t rush in at the first opportunity.” A surge of impressive-looking tech sector growth in the city – Ofcom opening a Northern hub, games developer Unity expanding – suggests he’ll be onto a winner if, and when, he finds the right location.
The wise heads of the city’s office market agree. Michael Hawkins, head of regional office agency and development at Colliers International, says the flex sector offers an escape route for corporate occupiers that have been presiding over excessively large office portfolios for many years. “Corporates are saying they will reduce their conventional office footprint by 20%-30% but they are blaming the pandemic for a recalibration of footprints that was coming anyway because their real estate strategies were already bloated,” Hawkins explains. He guesses that what might have been an 80,000 sq ft office requirement before Covid will morph into 30,000 sq ft of quite fancy long-lease floorspace plus 10,000 sq ft of flex office space. “There is no question: flexible workspace is not just a floor filler,” he says. This will be music to Rosenblatt’s ears.
Six acres of carpet
But this kind of thinking cannot bring comfort to everyone. If you are the owner of large empty office blocks of a certain style, this is a stressful time. Of the 332,000 sq ft built at 100 and 101 Embankment in Salford, a mighty 272,000 sq ft is vacant. At 43,560 sq ft an acre, that’s just over six acres. Perhaps surprisingly, this is not deterring potential investment buyers, as Place North West reported. The next few weeks will see the publication of first quarter office take-up data revealing what properties in what locations have found favour with what kinds of occupiers. This may ease the nail biting. Or then again, it might not.
IN CASE YOU MISSED IT…
Salford’s secret millionaire
After several years of gestation and a rethink, a fresh set of plans have been revealed for two 56-storey residential towers in Manchester’s skyscraper cluster. The developer behind the £350m Plot G project is Great Jackson Street Estates, controlled by Salford-based Aubrey Weis. Who is he?
Aubrey Weis is a man or men of mystery: there are three Aubrey Weises listed at Companies House, all associated with the same address in Salford, and all with birthdays in December. But one is born in 1920, one in 1941 and one in 1949. Apart from this presumably clerical error, what do we know? Everything points to a cautious investor, protective of his strategy but ultimately prepared to pivot. In this case, gradually letting go of what looked like a solid retail strategy and swerving into city residential.
Not a fool
As the £350m Great Jackson Street scheme shows, Weis is canny, or well advised, or both. The 2019 plan for Great Jackson Street envisaged three towers of 27, 23 and 19 storeys respectively (totalling 69 storeys). The new plan is a big step up to a total of 112 storeys. Yes, there are site remediation costs (diverting sewers is not cheap) and yes, the city council is encouraging a tower cluster at Great Jackson Street, but even so that’s a big leap in ambition and, presumably, profit.
Retail to resi pivot
The second thing we know is that retail property has been significant to Weis and his family. Data from Datscha showed he owned three stores in Northampton, Nuneaton and Torquay, with two more (in Folkestone and Harrogate) owned by a charity with Weis family connections. Remind yourself that Debenhams signed very long, very generous leases, and that what today is a stricken asset class wasn’t a few years ago. It looked safe as houses. Weis tried to hold back the tide sweeping away such lovely landlord-friendly leases to the extent of launching a legal action to stop Debenhams closures in 2019.
Not a fool, again
Even so, Weis must have felt the plates moving under retail, and felt it earlier than most. In 2014, Weis was one of the co-vendors of the 50-asset Empire Portfolio of secondary retail sold to hedge fund Toscafund in a £145m deal. The way things have turned out for secondary retail, Weis did the right thing.
A place to call home
Big-money deals do not require a big-money lifestyle, and so far as we can tell, Weis’s private life is modest. Companies House paperwork on registered addresses takes you to a flat in a very ordinary mid-1980s block in Kersall, Salford. The best price ever paid for a flat in this block is reported to be £158,000, so Weis is not pushing the limits of luxury accommodation. Land Registry data shows the block was acquired by Rachel Weiss in 2001, paying £23,000. The flats in Great Jackson Street are just a tad north of that.
The Subplot is brought to you in association with Cratus, Bruntwood Works, Savills and Morgan Sindall.