The Subplot | Dark stars and black holes, renters reform, Blackpool

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

THIS WEEK

• Cosmic forces: dark star office buildings dragging the market down, and a valuation black hole. Together could they swallow the office market?
• Elevator pitch: your weekly rundown of what is going up, and what is heading the other way

DARK STARS AND BLACK HOLES

The office market’s negative energy problem

Should we be worried by death stars and black holes in the property market? Up to a point, yes.

Dark stars – otherwise known as stranded assets – have been a talking point in the office market for a year or two. Typically these are larger 1980s and ’90s buildings in fringe locations which would be all but impossible to repurpose profitably, and where residual value is low. There they sit, radiating negative energy in their immediate locality, and undermining wider office market confidence. Plus, of course, they represent a massive financial headache for the owners, particularly if they have debts secured against them. There’s a real problem in the suburban South of England – the FT points to Uxbridge.

Death star searching

Subplot had a diligent look for dark stars in the North and didn’t find many, although maybe readers wish to get in touch and reveal a few. This absence is the happy consequence of the chronic lack of new office building in the North in the 1980s and ’90s. There’s a couple of prospects in the not-spots of South Manchester, likewise suburban Leeds, but generally both cities’ larger suburban blocks are still more-or-less viable. Both cities’ potential dark stars – thanks to high land values and goodish office demand – are still worth repurposing, or a punt on repurposing. Oval Real Estate’s plans for Albert Bridge House, Manchester and Property Alliance Group’s rethink of Reedham House, King Street West, are cases in point.

Offices are okay

The North’s dark stars are mostly retail properties, and the office market – rather than being swallowed – is a potential saviour. Recall, for instance, plans to transform Manchester’s Debenhams and Kendals department stores into funky workspace. Meanwhile, developers such as Land Securities inch ever closer to a 2023 start on the first 320,000 sq ft office phase at Mayfield (although, interestingly, plans for MediaCity seem to have vanished into the long grass of 5-10 years away). But what Landsec’s decision reveals is that the big threat is not dark stars, but black holes.

Fear black holes

To find black holes look at the balance sheets, which are having the life sucked out of them by the invisible but irresistible force of revaluation. Thus Landsec’s results show asset sales down 10% on last year’s book value – that’s a lot in one year – and the entire portfolio was written down by £848m, roughly 7% which is truly awful but looks good compared to the write down on disposals. Landsec is AA/AA- rated, has cut its loan-to-value ratios and has a viable escape plan – so we probably don’t need to worry about them – but there’s no disguising that this is value destruction on a mighty scale.

Wow

There’s plenty of eye-popping value destruction going on locally, too. The 76,800 sq ft office building at Dalton Place, Manchester, would once have been a star asset, not least thanks to 15 years of outstanding lease to WeWork. Even though flex office space is still super hot, WeWork is not, and a block reputedly on the market for £44m last year is now said to have changed hands for £28m. Wow. This is even more wow-worthy when you look at the accounts for the tenancy special purpose vehicle, and realise £42.8m in rent is still owing over the life of the lease (£24m shorter-term). It suggests somebody doesn’t rate that income as very safe.

Wow squared

Or try this. Abrdn is asking £53m for the 175,000 sq ft One Tony Wilson Place block at First Street, also Manchester. That’s a breathtaking £20m less than was asked in May 2022, and translates into a yield that hasn’t just moved out, but ricoched into outer space, travelling from 5.75% to a barely believable 8%. The current guide price is around £13m less than Abrdn paid for the building when it was acquired from Patrizia in 2016, and remember the building is scarcely an old crock. It’s BREEAM Excellent and exactly the kind of block everyone is supposed to salivate over. All of which has to be double wow.

Extinction event

If you aren’t over your ears in debt – and in these examples the owners are okay – this kind of black hole event is regrettable, and painful, but absorbable for most landlords, providing it doesn’t turn into a rout. Maybe it’s just a paper write-down of the crazy valuations of the recent past, in which case it’s a big shrug and move on? But for landlords with high loan-to-value ratios, or loan covenants to worry about, or curious liabilities, or unbalanced portfolios, this is a potential extinction event.

The real danger

Death star chatter in the North seems overplayed. Much of it was imported into the UK by US private equity suits whose attitude is heavily influenced by the US office market, which is in a dreadful mess, crowded with death stars. The angst is so out of control that serious people wonder if New York’s days as a major office centre are over, and it’ll just be a Fun City from now on. Nobody in their right mind sees risks on this scale in the UK but black holes are popping up all over the place and some landlords and their shareholders are going to be pulled in, never to be seen again.

ELEVATOR PITCH

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

Car parks are very now, very contemporary, in Blackpool, where time has stood still. And if you think the supply of good private rental properties is about to go up, Subplot has a bridge to sell you. Doors closing, going down!

 Car parks

Local councils can do amazing things, and if they have imagination and can seize the day, now is a good time to sort out some long-term issues. Wirral Council, for instance, wasted no time buying the 585,000 sq ft of retail space in The Pyramids and The Grange from Mars Pension Fund. In Blackpool, though, it’s all about car parking. The council grabbed its chance to buy another lot on King Street, with car parking in mind. It already has plans for a 700-space car park further up the road.

As the Place North commenting community was quick to point out, a bus station might have been more useful, and it’s not clear existing car parking provision is well used. Large empty lots do not an appealing night-time environment make and anyway, THIS IS 2023. The sense of a town trapped in the past grows ever harder to resist.

 Rental reform

The government published its Renters Reform Bill yesterday. Having flunked abolition of the leasehold system and its replacement with commonhold, there isn’t much left to do. The sad centrepiece is the right to have a pet in your flat. Yet what was meant to help beleaguered tenants will probably do the opposite, if early reaction is born out. How come? It’s all about minimum rental lengths, typically the six-month short-term assured tenancy.

So recall the problem: the government (via Help To Buy, nimby-ish restrictions on supply, and loose money) stimulated the For Sale market, hugely pushing up prices, while simultaneously doing various tax-based things that deterred buy-to-let. No surprise that many private landlords decided to take their capital growth winnings, sell up and get out – polling by research consultancy BVA-BDRC found that in Q1 2023, 33% of private landlords in England and Wales said they planned to cut the number of properties they rent out, up from 20% this time last year. Result, huge rental inflation because the supply of rental properties plunges. Meanwhile, many of the landlords who remained twigged it was possible to make more money in a less regulated environment by letting via AirBnB and equivalent holiday let platforms.

So it’s odd that the Renters Reform Bill seems designed to stimulate the holiday let alternative to socially-useful long-term rental. “At present, assured shorthold tenancies can be no shorter than six months, so as a landlord, having gone through all the preparation for a new tenant and expense of advertising the property, you know you will be guaranteed at least six months of rent,” Ian Fletcher, director of policy at British Property Federation tells Subplot.

“Our understanding is the Government’s proposals will have no minimum period, so on day one of the tenancy, the tenant could serve notice, which is normally two months, and be gone. There are already lots of incentives to do short-lets – tax and regulatory. One of the few incentives to let out property for the longer-term is that guarantee of six months, but that will be gone,” Fletcher adds.

This omission – if it sticks – is either careless, or deliberately designed to screw things up, or just a sign of a seriously incompetent government.

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