Welcome to The Subplot, your regular slice of commentary on the North West business and property market from Place North West.
This week: will a major civil service relocation from London lead to a big win for Manchester, or will Leeds be celebrating? Manchester’s £2.8bn digital sector is flourishing but turning home-grown success into floorspace might not be so easy, recruitment consultants tell us. And why there will be more American money in North West property this year, despite pandemic uncertainties. Subplot has gone digging so you don’t have to.
Excited chatter about a ‘Whitehall of the North’ has been pretty much an annual pre-budget event since 2009. So far, it has been a reliable let-down. Chancellor Rishi Sunak’s plans to relocate 22,000 civil servants to the regions kick-started the latest seasonal wave of speculation. What can Manchester expect from the 3 March announcement?
The big prize
The Treasury North campus is the jackpot. If 750 staff relocate from London, it could mean 50,000-80,000 sq ft of new office space, plus additional outposts from other government departments. The Cabinet Office is reported to be focusing on creating clusters of like-minded departments, with Yorkshire and the North East tipped for an economic policy cluster. That means Leeds, York or Newcastle could be Manchester’s rivals.
Diplomats on your doorstep
An alternative possibility is the Foreign & Commonwealth Office. Manchester’s international reputation, the airport, and the presence in the city of the British Council, one of the FCO’s executive agencies, makes it sound plausible. If the FCO relocated 20% of its staff, that would be 1,000 jobs, perhaps 100,000 sq ft. Or maybe the attention focuses on FCO Executive Services, one of the arm’s length bodies? This too has around 1,000 staff. The agency has recently been hunting for new locations in the South, which suggests it is footloose. Or maybe the former Department for Overseas Development, now rolled into the FCO? This has 2,600 staff, which would translate into a meaty office requirement.
A final outlandish possibility is relocation by the FCO-sponsored Secret Intelligence Service (MI6, the James Bond lot). It makes sense given the city’s cluster of hush-hush organisations including GCHQ, MI5, the Office for Communication Data Authorisations and the Home Office at Salford’s Soapworks. SIS has 15,800 staff, so if a fifth head North West that is a substantial requirement. Subplot spoke to its contacts in the world of spy property – such people exist – and the feeling was that while SIS needed more space, as proved by recent expansion into former FCO offices at One Bessborough Gardens, they were not known to have a regional requirement. But in this looking-glass world, who can really tell?
Reasons to be cheerful
Manchester’s de facto second city status makes it a good fit for the Treasury. The British Council’s foothold in Manchester makes the FCO a shoo-in, too, even if Glasgow could provide powerful competition. Meanwhile, half of the Department of Culture, Media & Sport’s 450 London-based staff are to move to Manchester by 2025-26. And there is still the 600,000 sq ft balance of existing North West civil service consolidation plans to sort out. So lots to get excited about.
Reasons to be cynical
And yet it is hard to get excited after so many false starts. Take the British Council, for example: it arrived at purpose-built 110,000 sq ft Manchester offices in 1991, and bailed out (to Bridgewater House) in 1997 as part of a gradual unwinding of its commitments to the city. Researchers say this kind of disappointment is endemic to civil service relocations, which rarely make any kind of management sense. A recent Institute of Government report makes hilarious reading, detailing decisions on staff movements which bear no relationship to local labour markets or the prospects for career progression. The end result is failure and rapid reversal. A classic example is the Office for National Statistics, which lost 90% of staff when it moved to South Wales in 2014 because it turned out to be a bad area to recruit statisticians. Who knew? The report also shows how most relocations do nothing for the local economy.
But this time it’s real?
Hard to say. Sir Richard Leese, leader of Manchester City Council, spoke to Subplot as rumours swirled late last year. Leese said: “It looks a lot more serious than it was before. It was a government manifesto commitment, which helps a little bit, and judging by the engagement we’re having with the Government Property Agency there seems to be serious intent.” Leese sits on one of the more relevant government taskforces and is nobody’s fool. On the other hand, a discreet Treasury requirement has already touched the ground in Leeds, and Subplot is told this is significant. One senior agent familiar with the dynamics says: “If anything heads North it will go to Yorkshire, not Manchester, because the Tories like it better and there are more swing seats.” Yorkshire cities also have larger, cheaper sites.
And the winner is…
If it is green-for-go, the first tremors of excitement will probably come from one of two sites. Since 2009, attention has largely focused on the possibility of a substantial relocation by multiple departments adding up to a civil service cluster of as much as 700,000 sq ft at U+I’s Mayfield development. More recently Manchester City Council sources have linked a requirement for up to 10,000 jobs to the Ancoats Central Retail Park site where, coincidentally, they plan a 1m sq ft office development.
Whether the wind is blowing towards Mayfield or Ancoats should become apparent on 3 March, when Chancellor Rishi Sunak delivers his budget.
DRIVING THE WEEK
High hopes for economic recovery hang on Manchester’s powerful technology sector, for developers and local politicians alike. But labour market issues mean turning tech growth into sq ft isn’t straightforward.
Manchester hasn’t quite bet the farm on its technology and digital sectors, but nearly. Manchester City Council has put the tech sector at the centre of its post-pandemic recovery strategy. Developers have followed the same logic: Federated Hermes/MEPC have the tech sector in their cross hairs for the city’s first COVID-era speculative office scheme, hoping it will help fill 200,000 sq ft of new space at NOMA when it is completed in 2023.
Politicians and developers are not being daft. Thanks to occupiers like Amazon, Booking.com and HPE, Manchester was identified as a ‘Rising Global Contender’ in the Savills Tech Cities programme for 2021, the only UK city outside London to be named. Meanwhile, Manchester’s £2.8bn GDP digital economy has already attracted the attention of some of the tech names tipped for rapid growth in 2021, like €55bn Dutch payments processor Adyen. Maybe not well-known yet, but Adyen is a fintech unicorn with ballooning business volumes and clients like Nike. It is a great name to have on your team.
Dr Feelgood agrees
Subplot spoke to Richard Holt, head of global cities research at Oxford Economics, and one of the world’s leading authorities on city prospects. His team has concluded Manchester is a winner. Their latest analysis (December 2020) showed Manchester enduring one of the sharpest collapses in GDP of the 30 major European cities (GDP down 11.3% in 2020, only four cities did worse). But they predict an above trend recovery. Manchester will see the third fastest growth rate of Europe’s major cities in 2021, with GDP growth of 7%. By the end of the year Manchester will be roughly back where it left things in 2019, an amazing achievement. Holt’s team say this is thanks to a large professional, scientific and technical services sector, which is able to adapt to home working. Holt adds: “Manchester’s tech sector is thriving because remaining in Manchester as you grow or your career progresses has become a viable thing to do.”
Now the slightly bad news
According to Holt, the huge competitive power of the big tech players, the mobility of tech entrepreneurs, and the tech sector’s habit of spawning vast numbers of new businesses that never have a single customer or viable product, mean that a busy tech sector does not easily translate into sq ft occupied. Holt says: “If tech entrepreneurs become successful, they can quite easily move on. Success can be self-defeating for the city that hosts them.”
And some more
Perhaps you already spotted it? If Oxford Economics is right, Manchester’s strong post-pandemic recovery depends not on a vast stock of good quality offices, but on the fact that so many of the city’s businesses don’t need offices at all. Jack Such, specialist at Manchester tech and digital recruitment agency The Candidate, agrees. He says: “We’ve just filled a place for a Manchester-based job with someone from Scotland, and they are staying in Scotland, and that’s not unusual.” Such says remote working took off in the tech sector long before the pandemic, and is now entrenched. Such explains: “Manchester firms are employing people from London on a fully remote basis, and vice versa. This is a huge shift, and very much to the benefit of tech firms who can now recruit from a much larger pool. They aren’t limited to recruiting from people who can get to the office five days a week.” This means a growing business will not necessarily translate into more floorspace. There will be lags.
We need to talk about skills
This is not the only brake on tech office occupancy growth. Success breeds its own problems, and Manchester is beginning to feel them. According to Such, there are limited but significant skills shortages and a lot of increasingly expensive churn. There are around 4,000 Manchester digital vacancies to be filled. Such says wage growth in Manchester means the pay differential with London is now down from 15-20% to about 10%. It is zero in some specialisms (particularly back-end niches like PHP and cloud hosting). Such says: “We’re getting people with experience sitting in jobs for 12 months, then after that it is a cycle of Manchester tech companies poaching talent from each other. Only the biggest can keep people by offering the best benefits.” Such says that one of the ways businesses can overcome this is by recruiting remotely, which takes us back to square one.
All of this matters because relocators to Manchester want access to the local talent. Richard Lowe, office agency director at Savills, says: “For firms moving into Manchester from elsewhere in the North West the move is about getting into a bigger recruitment pool. And while it is all about recruitment and retention, it is also about being in a cluster with like-minded people and businesses.” Lowe does not think the tech sector’s constraints will ultimately damage take-up. Joe Rigby, occupier services specialist at CBRE, agrees that the cluster-effect could neutralise the recruitment glitches. He says: “Being together in a cluster is a big driver of productivity in the tech sector. Maybe you can get coders working from home. They are more introverted, they stick in their airpods and start writing, and why can’t they be in Scotland or Cornwall? But outside of that, I don’t think it will have a major impact.”
Not so fast
Rigby says: “Manchester is absolutely on the radar for any tech business setting up shop in the UK. They will start looking in Manchester simultaneous with their search in London, that’s how seriously they take the city.” Nobody doubts Manchester’s tech sector is delivering massively for the city, but the price of success is that it has labour market constraints to contend with. Assuming that it can quickly deliver growth to replace other office occupier sectors might be a mistake.
IN CASE YOU MISSED IT…
The Yanks are coming, again
Miami-based investor Starwood Capital has ridden back into Manchester to partner Property Alliance Group in the purchase of the Renaissance Hotel eye-sore on Deansgate. A £200m mixed-use scheme is planned, as Place North West revealed.
Starwood, with $60bn of assets under management along with $50bn of capital, is a regular visitor to the city’s property market. It reappears as US investors prepare to make another assault on North West real estate. Savills estimate that around 30% of Manchester’s commercial property investment came from overseas in 2019. Roughly half of the overseas investment in Liverpool comes from the US, Datscha figures suggest. And more could be heading to both cities as the pandemic eases.
The tap is on
According to data just published by the Amsterdam-based European Association for Investors in Non-Listed Real Estate Vehicles and the Pension Real Estate Association, institutional investors and funds plan to deploy a minimum of €26.5bn new capital into European real estate in 2021. That’s a lot of dry powder. At the very least, it means nobody is turning off the tap of global capital seeking diversification opportunities, which is good for Liverpool and Manchester.
Look closely and the data suggests North American money could gush even more plentifully. Overall, institutional investors are not yet meeting their allocations to property, undershooting their average 10% target by 0.7%, suggesting growth is more likely than not, if they can find the right opportunities. Yet North American investors have a higher average weighting to real estate, and are undershooting even more seriously, missing their 11.4% target by 1%. And don’t forget the €34.5bn (and rising) of mostly US private equity injected into European real estate each year. With property now one of a handful of asset classess offering any kind of return, private equity volumes will only increase.
The conclusion: Starwood will not be alone, as more US and Canadian money heads the North West’s way.
The Subplot is brought to you in association with Cratus, Bruntwood Works and Savills