The Subplot | Regional offices suddenly make sense – here’s why

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

• Mind the yield gap: regional offices suddenly look good value in the way regional shopping centres have done for a while
• Elevator pitch: your weekly run down of what’s going up, and what’s heading the other way

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MIND THE (YIELD) GAP

Regional offices suddenly make sense

When a proposal for a 530,000 sq ft office scheme in Preston emerges, you know something in property investors’ big clever spreadsheets has changed.

Is now the time to be mulling a 530,000 sq ft office-led redevelopment in central Preston? Belfast-based Martin Property Group thinks so, as its managers prep plans for four blocks on the surface car park of the town’s Fishergate shopping centre. It’s very early days – Martin has asked for a scoping opinion from planners – but this is worth watching. As fingers in the wind go, it’s a useful one.

Start here

The background: Fishergate is one of several regional shopping centres acquired by Martin in a recent splurge. The business paid £8m in 2021, an absolute bargain. Investors have had their eye on this kind of city centre retail site for some time, as Subplot has reported, and the presumption had been that residential development would make sense in most places. Martin is exploring the possibility that the answer is, in fact, offices.

The proposal

To begin with, there would be 103,900 sq ft in one corner of the car park, then building on through blocks of 70,500 sq ft, 147,500 sq ft, and 208,300 sq ft. All close to the mainline rail station and shops, so ideal for many businesses. The rest of the Fishergate centre will probably have a more residential feel, and be taller, Place North West reports.

Office supply

Two factors make this very large scheme seem plausible. First, there’s little good quality office space in Preston, which has a growing office-based economy. The Central Lancashire Employment Land Update released in 2022 suggests about 22,000 office jobs – more than half the south Lancashire total – are in the city, and the city’s crop of office occupiers is growing faster than its neighbours in Chorley and South Ribble. So it’s big business.

Also doubts

There’s a lot of room for debate on how much of what the city’s office market needs. The 2022 analysis is pretty clear that smaller flexible space is what’s required most. “Further development of office uses in Preston city centre is inhibited by a lack of modern multi-occupancy space, with a lot of secondary stock here being converted to other uses. The longer term prospect of building up Preston’s office market would be dependent on delivering new or refurbished premises into the city centre,” the document said, adding “…demand for new large-scale space remains modest and does not yet seem to support large-scale investment in new build options, as evidenced by the cautious attitude of developers of new offices in Buckshaw Village.”

Sunny side up

But don’t be downcast. Martin will probably have first-mover advantage – being the only show in town – and it can phase development to match demand. Plus, it has additional comfort coming from the much bigger European-level property market dynamics.

Yield gap

Investors like yield gaps, and there is a wide and growing yield gap between the returns on office investment in Central London and offices in the regions. Savills looked into this, recorded that the gap is 2.6%, which is the highest it’s been for 32 years, and concluded that this could drive increased investment – because who wouldn’t want to make 2.6% extra on their money? While returns on office property are still unimpressive, they are improving, and improving fastest in the regions. So it’s all good.

Wanted: people like this

“There will be office occupiers that seek the best-in-class space, but at a discount to other office markets across the world, including London, and this is a future driver for the ‘Big Six’ office markets in the UK,” said Savills. “This, coupled with the high yield gap, presents an attractive investor proposition for UK regional office.”

2024 is the year

At an even more macro level, investors looking across Europe see the UK as an increasingly good bet. Yes, there are still problems like higher financing costs, lower collateral values and structural changes, all of which stresses commercial mortgages and loans. Yet Moody’s Ratings thinks the UK markets have corrected faster than the Eurozone, and they expect a recovery here in the second half of 2024. Fingers crossed that’s right.

Local hero

Back in Preston, an apparent shortage of office floorspace plus first mover advantage plus investor interest equals a good thing. What would make it a fantastic thing is a bit of public sector help. Can Martin expect that? The Fishergate site is part of the Station Quarter office corridor meant to capitalise on Preston’s status as an HS2 high speed rail stop (may it rest in peace). The city council very much wants to see Grade A office space built, and it has a masterplan that says just that.

Wrap it up

Some kind of wrap-around lease might be just what the Fishergate scheme needs: so the city council takes, say, a three-year lease and if Martin lets it above the rental level that the council pays, the council gets a refund.

The city council wouldn’t be drawn on whether this was a possibility but when approached by Subplot said that it is “working with partners on the Preston Regeneration Board to explore what support is required to provide a comprehensive development in line with the objectives” of the Station Quarter regeneration framework.

In the meantime, work is going on to revise the original city investment plan, which is supposed to run until 2035. None of this is a ‘no’ to some kind of support. Subplot asked Martin Property Group if public sector support would be required, but hasn’t yet had a reply.

Opportunity-driven investment in the city’s retail sector could turn out to be a gift for Preston’s office sector. And it won’t be the only second-tier Northern office market to see some interesting proposals emerge in the course of 2024.

ELEVATOR PITCH

Going up, or going down?

Suddenly the prospects of Liverpool skyscraper development look a lot better, thanks to the re-appearance of an old prophet of towers; and a promising week for York if the timetable for York Central works. Doors closing.

Scousescrapers

Big comebacks always make news (you’ve just celebrated Easter), but the return of Hugh Frost, founder of Beetham Organisation, to the Liverpool property scene is a cracker. Beetham’s pre-Great Financial Crisis development record was impressive, and was crowned by four towers in Liverpool, Manchester, and Birmingham. The Northern skyscraper revolution wasn’t entirely Frost’s idea, but he was certainly its prophet, and by mixing hotels with apartments he created a formula that allowed such enormously risky, capital intensive projects to get out of the ground.

Now Beetham has acquired a site at Gibraltar Row in Liverpool. Planning documents suggest it’s suitable for 1,200 homes. The idea is to get the old band together and create another skyscraper. It will be in the shadow of West Tower, Beetham’s first 40-storey block, completed in 2005.

Frost has had the patience, endurance, or luck to reappear in a time even more favourable to big resi towers than the Noughties. Cushman & Wakefield data published this week suggests about a 300% increase in investment since then, thus taking a niche interest into the mainstream. An analysis this week was full of lovely upward-ticking trend lines and even weightier portfolio allocations to the living sector. Private rental and student housing were top picks, but every line is going up.

Liverpool City Council’s limited enthusiasm for ‘scrapers, and the expectations of the funding market, are the trip hazards Frost has to avoid. The Cushman & Wakefield report suggests joint ventures are in a lot of investors’ minds just now (page 18) and most think the market is hitting the bottom at this very moment (Q2 2024, page 22). Moneypeople want experienced developer friends, and they want them now. If Frost is to overcome these hurdles, this is probably his golden opportunity.

York Central

Some fairly quick footwork means it’s taken just four months for McLaren Property and Arlington Real Estate to sign a development agreement for the £2.5bn York Central site.

Homes England and Network Rail Property are the county parties on the scheme due to deliver 2,500 homes and 1m sq ft of commercial floorspace. Work is already underway on around £135m of infrastructure work – vital if the landlocked site is to be opened-up. This includes just over a mile of new roads and two new bridges.

The phased development itself won’t be as fast-paced as the deal. It is slated for completion by 2035. The world may look very different by then, perhaps as different as today is from the early 2000s, when the York Central plan first emerged (Subplot, 14 December 2023).

Back then nobody had heard of build-to-rent – and if they had they would have laughed. Likewise, life science labs and coworking and the other plate-spinners of today’s property market. And that’s the danger of big projects like this: either development agreements freeze the scheme in the past or they permit a constant effort to reimagine them to capitalise on an ever-changing market.

Subplot asked the landlords, developers, and council how long the recently signed deal was due to last and when the breaks or drop-outs occur. No reply yet, but keep your eyes open.