The Subplot | Safe property bets, dining out, big yawns

Welcome to The Subplot, your regular slice of commentary on the North West business and property market from Place North West’s analysis editor, David Thame.

THIS WEEK

• Taking cover: how to avoid getting wet when the economic storm breaks
• Elevator pitch: your weekly rundown of who and what is going up, and who is heading the other way

TAKING COVER

Defensive investing in the North West

As June drizzle chills the soul, the region’s brightest are readying themselves in case the economic weather gets rough. What are they backing?

The sky is darkening, the atmosphere is threatening. Yes, it’s an English summer. But in the background a long bull run in the stock markets is ending and inflation growing. The smartest people in property are now starting to plan defensively because, well, that’s what you should do. What are they thinking?

Chins up

The first thing they think is that ‘it could be worse’. This wins full marks for positive attitude and is in some senses true. The latest regional GDP figures, released a few days ago by the Office for National Statistics, show the North West and London as the two fastest-growing regional economies from July to September 2021. But don’t get carried away: this is historic data, and it was in any case fairly anaemic (1.2% in the North West, 2.3% in London). We know a lot has happened since. But, small mercies, it shows the region has some bounce.

Also umbrellas up

The second thing is that they do, indeed, take the current situation seriously. The Ernest Hemingway line about change – that it comes gradually, then suddenly – is in the front of many minds. “This cycle feels like it’s peaked and a market correction is imminent, with the economy on a downward trajectory towards recession and further interest rate rises a matter of when, not if,” says David Lathwood, chief executive at niche investor Pitalia Real Estate. So towards which property sectors should we lean, and which should be swerved?

BTR may be ok

Residential is a conundrum. Clearly inflation plus rising mortgage costs (and tighter lending criteria), plus nasty stories about negative equity and repossessions, will chill the market. But how much and where is a moot point. “The build-to-rent market should be ok as people delay their plans to buy and rent instead. Sales however may become difficult in the sub-£400,000 market, so it’s the best locations and the best product that will be the focus,” says Lathwood.

And co-living?

The sense that good quality rental will survive is shared by Stephen Beech, chief executive at Beech Holdings, one of those many businesses to whom the last decade has been kind. His feeling is that Manchester remains a safer bet than London (meaning more affordable to the dynamic 18-30 cohort). “Our money is on this market,” says Beech, adding that this is what makes him think co-living will come out of the storm looking good. “It is a sector that caters long-term for the 18–30-year-old renter,” he explains. “Affordable, high-quality homes in great locations never run out of demand.”

Offices to avoid

If BTR and co-living feel like good bets, how about the office market? Manchester has a lot of new empty office space and more coming, amounting to about 1.2m sq ft. Take-up, meanwhile, is sluggish (Subplot, 5 May 2022). Liverpool is moving even more slowly. Higher quality smaller floorplates are now in vogue, and that’s something which, on the whole, neither city has to offer. Meanwhile, requirements will shrink further. “Professional services firms were already taking less space than in 2019 – they’ll double down on this in a downturn,” says Lathwood.

Small is beautiful

The safe bet is probably to look at good out-of-town options and good small (2,500 sq ft or less) city centre suites where demand might hold up, says Stuart Keppie, doyen of Liverpool agents and founding partner at Keppie Massie. “Take-up in Liverpool’s main office core has just experienced its lowest first quarter in the 20 years we’ve been measuring it, and yet rental levels have risen in the area over the last 18 months for the better stock. Therefore I believe there is still value in this market given that rents are likely to rise further,” Keppie says.

Specialists survive

You could also put a side bet on life science, serious tech and healthcare floorspace. “High spec workspaces let to government, healthcare or life sciences and R&D will hold their value. The weight of global capital coming to the UK to back businesses in the latter sector isn’t going anywhere,” says Lathwood.

Lets go the last mile

And industrial, the poster-child of the pandemic property market? The consensus is that values have peaked. From now on the story will be about adding value, which predominantly means creating flexible urban logistics floorspace out of less-favoured alternatives: someday soon a tired shopping centre near you is about to be reborn as a parcel hub.

ELEVATOR PITCH

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

Opportunities to look cool in front of your mates are going up, up, up, and property investors are following. Meanwhile a slice of Wirral Waters finally judders to the first floor.

Instagrammable property

If there was ever a straw in the wind, then Aviva Investors’ decision to off-load Manchester’s Corn Exchange is a straw in the wind. Where it blows will tell us a lot.

The 190,000 sq ft centre, acquired for £67m in the pre-historic, pre-iPhone days of 2005, is to be sold for £43m. You can do the maths yourself, remembering to add the £30m spent converting it from failed specialist shopping mall to fairly successful food court. This has been an expensive journey for Aviva’s open-ended fund, which is now being liquidated. It’s a shame for them that dining in 2022 turns out to be worth less than retail in 2005.

The wisdom was (and still is) that Instagrammable “experiential” destinations would survive the deluge because we’re all show-offs, and we all like a bit of fun. There’s enough people around who still think this is sound reasoning despite the cost-of-living squeeze, and have £43m to spend proving their point. The yield, in the high sixes, will appeal to many.

Aviva’s open-ended fund was smallish, and frozen since the start of the pandemic. Its value is somewhere between £300m and £400m, and the fact that nobody is quite sure is part of the problem. It represents the end of a certain vision of gung-ho property investing after what is coyly called a “liquidity mismatch.”

The real winner here is Blackstone, the US private equity giant, who bailed out of the Corn Exchange in 2005 with a hefty pay day.

All at sea

So here we go again. Peel L&P wants to turn the grade two-listed hydraulic generating station in the Four Bridges quarter of Birkenhead’s East Float into a centre for maritime education and training. This is a super idea. The trouble is it was first announced in 2014, saw a design competition in 2018, and only now, four years later, is Wirral Council looking at a planning application.

This is the kind of project local authorities like to see, and no doubt Wirral is prepared to give it some latitude. And yes it is all very complicated as historic waterfront buildings often are, and yes, marshalling a long list of partners including Liverpool John Moores University, Wirral Council and Mersey Maritime must be hard work. But too much de-risking ends up creating stasis. If work on site begins before the idea’s 10th anniversary that will be a delightful surprise.

Get in touch with David Thame: david.thame@placenorthwest.co.uk | 01544 262127

The Subplot is brought to you in association with Oppidan Life.