The Subplot | All about the money, offices, suburbs

Welcome to The Subplot, your regular slice of commentary on the business and property market from across the North of England.

THIS WEEK

• Northern property funding is about margins, not mayors
• Elevator pitch: your weekly rundown of who and what is going up, and who is heading the other way

WHY IT’S ALL HAPPENING IN THE MARGINS

Mayors campaign, but margins matter

Yes, yes, the North needs more public funding. But if regional leaders want a rapid impact they need private funding. Wise heads are looking at the lending margins.

This week’s big Convention of the North didn’t come up with many surprises, except the fact that it happened at all and everyone turned up. The last similar effort, mid-train strike, couldn’t boast either of these achievements. It’s hardly news that the Northern mayors – Burnham, Rotheram, Brabin – want improved funding, ideally independent funding. Nor is it news that Michael Gove makes warm noises without actually doing much (because HM Treasury won’t let him). However, events in the margins of the conference could be a lot more significant.

Bucket of cold water

Now is not the time to get excited about ambitious plans to ensure city regions get block grants, or control of local tax revenues. Nor will ministers easily surrender the pork-barrel control that comes from inviting councils to “bid” for infrastructure funding. For either to make any measurable difference there would need to be a massive redistribution/rethink of infrastructure spending, and a huge boost to the revenue spending that covers day-to-day expenses. That just isn’t going to happen in the short or medium-term, whatever the government’s colour. Even if it did, it wouldn’t affect economic outcomes for decades.

The dripping tap

So let’s look instead at the second pot of money – private funding – which matters because it is available now, and can make a rapid impact. Here, the story is more encouraging and the key number to watch is the margin. Margin is the extra lenders demand over the appropriate base rate – the spread would be another way of expressing the same idea. Its the price of risk. When it comes to investment, the better-placed developers who spoke to Subplot say this is isn’t so much a case of the tap being on, more about a tap dripping regularly.

Margins doubling

Subplot has been told of many regional deals in which margins have widened dramatically, doubling from 2% to 4% in some cases. Yet lenders are happy to back trusted partners with projects in some chosen sectors. What sectors? Senior care, rental housing, student housing, all come high up the list. What partners? Partners you already know is the answer.

Friends in the North

This week’s Precede Capital Partners/Nomura £227m four-year loan to Downing Living to support its 1,790-unit co-living scheme at First Street in Manchester, is a case in point. International capital has plenty of time for this kind of adventure with a well-known developer name: Precede is backed by Canadian giant QuadReal, Nomura is from Japan. Meanwhile Renaker is seeking a £119.7m loan deal a lot closer to home, with Greater Manchester Combined Authority. Margins in both cases are not yet public knowledge, but it’s clear the trusted partner angle is important.

Young friends, too

Student housing continues to appeal to lenders, and margins here are a touch keener. This week Investec Real Estate was trumpeting a £1bn student housing loan book, the latest being a 51-month, £65m development loan to Scape, the global PBSA provider, to support the construction of a 693-unit scheme in Leeds. Investec has provided Scape and its partners with over £142m of development finance, across five UK schemes.

What the academics say

Serious analysts say the big picture is pretty much what you’d expect: the debt market was rosy until June, then fell off a cliff and has struggled to climb back up. However, the latest Bayes Business School analysis, which takes us up to the start of January, suggests some new directions, as the lending market mulls the future. Residential and urban logistics is looking a little over-stretched as the last five years of hyper-optimistic valuations unwind; retail and offices looking rather good as hyper-pessimistic post-pandemic valuations get revised. Lenders will be adjusting their strategies accordingly.

Back to margins again

Lending terms appear to be stabilising – at least that is what CBRE’s latest deep dive suggests. Average interest rate margins on loans to support super-prime offices, and on build-to-rent housing, hovered at 1.65%, which is a lot better than some. Retail margins moved in a little to 2.75% suggesting lenders are recovering their appetite. Loan-to-value rations remained conservative at 50%-55% typically, though it all depends who, what, when, and where.

Hot takes on lending margins may not be making the headlines, but it is likely to make a significant difference to what gets built in the North. And unlike the political grandstanding, it’s actually going to lead to bricks-and-mortar results.

ELEVATOR PITCH

Going up, or going down? This week’s movers

Office markets find some stability, and suburban centres some hope, so a good positive week in the lift shaft.

Office markets

Predictions of the end of office space turned out to be wide of the mark. Manchester and Leeds have now reported on 2022 take-up and both look solid.

Manchester city centre recorded 1.2m sq ft of deals, with 427,000 sq ft secured in the final quarter. This is within spitting distance of the pre-pandemic total of 1.45m sq ft signed in 2019. Out-of-town markets totted up 741,000 sq ft, which is marginally down on 2021 but not enough to worry about, Manchester Office Agents Forum figures show.

Leeds Office Agents Forum data shows city centre take-up of 618,000 sq ft, a shade down on 2021 if you wanted to be mean about it, or evidence of solid stability if you felt a more generous interpretation was due. The final quarter of 2022 was particularly strong.

Leeds out-of-town take-up was 272,000 sq ft, but then this is a strange market. In 2021 deals topped 474,000 sq ft, so something’s going on. A return to dull normality maybe?

So, not the end of the office as we know it. But also not the storming recovery many would like to see. The best word is “stable.” We’d know a little more if we had some net absorption figures – these would reveal who had the whip hand, landlords or tenants. Colliers’ last look at this (at a national level) suggested many more markets were finely balanced, and some were tenant-led. “A new phase of rebalancing” Colliers called it.

Suburban decline

The commercial real estate story of this decade is likely to be more about suburbs, and maybe a little less about city centres, or so many big brains believe. A £15m slice of the UK Shared Prosperity Fund has been funnelled into 280,000 sq ft of out-of-city-centre workspace by the Greater Manchester Combined Authority.

The list of refurbishment and rebuilding included one in each of the 10 Greater Manchester boroughs, embracing digital innovation space at Stockport Merseyway, co-working in Rochdale, and a former Debenhams. One shouldn’t get too hooked on the “job created” figure (800, for the record) because real estate does not, nor ever could, create jobs. But as a cost-effective way to produce workspace this is a winner. At just £54/sq ft it takes some beating.

Get in touch with David Thame: david.thame@placenorthwest.co.uk