In the 1960s, the North West was part of the British invasion of pop music that took the US by storm, with the Beatles being a prime example. In 2015, Manchester is facing its own British invasion, as UK institutions buy up foreign-held office stock.
At the moment the core Manchester office market looks like the global recovery in a petri dish. Resurgent US and UK investors are slugging it out with now-established Asian and Middle Eastern money. And, as the stakes get ever higher, more cautious European players find themselves retreating.
The prediction, made by JLL and others at the start of the year, was that 2015 would be the year in which the old stalwarts of the UK institutions started to pull out of London to redeploy elsewhere in the country, in the face of heavy fire from foreign investors driving razor-sharp yields in the capital.
UK institutions are certainly taking back old territory. In 2014, they poured in a whopping £1.4bn into the North West – 46% of the total – up from a 29% stake (£534m) in 2013, according to Savills. Institutions piled a staggering £2.7bn into the North as a whole, and the agent expects this to jump past £3bn this year.
All that activity pushed investment in North West commercial property up by 66% to a whopping £3.1bn in 2014. That makes 2014 the second-best year for the region this century (2007 was the best). Leading the way has been Manchester, where CBRE is predicting rents could climb as high as £38 per sq ft by 2018-19.
Colliers North West head Jonathan Mills says domestic buyers being pushed out of London have accelerated this trend. “It has led to a turnaround in the buyer profile – most of the prime stock has headed back into UK institutional hands. They have more money than European rivals, who are also looking to spread investments on a pan-European basis.”
Analysing the buyer profile illustrates a clear trend, with 2014 seeing a spate of city centre trophies being sold back to UK institutions by European money. After buying 3 Hardman Square from Aviva in 2008, Credit Suisse sold the block on to M&G for £91.7m. The Israelis sold Peter House – which they bought in 2011 from Serviced Offices UK GP – to Rockspring for £23m. And 4 Hardman Square, bought by Germany-based GLL Real Estate Partners from the BP Pension Trust in 2012, was taken on by Orchard Street for £31m, a record yield for the cycle at 4.95%.
Add to this Irish Bank Resolution Corporation’s sale of Chancery Place to NFU Mutual for £57m, SWIP’s £35m buy at Sunlight House and L&G’s £75m purchase of One Piccadilly Gardens from Europa Capital, and a picture emerges.
CBRE says institutional investors have had the upper hand for 12 months. “Manchester city centre is now dominated by institutional money,” says senior director Colin Thomasson. “Last cycle we saw that money trickling into Leeds, Liverpool and Newcastle – but that has been less prevalent this time around.”
In fact, only the Germans are holding their ground in Manchester, with a trio of Schroders funds buying Bruntwood’s City Tower for £132m. While German investors are known to be more bullish towards Manchester right now than their fellow Europeans (see feature, p110), this deal still turned out to be a special circumstance. Sources close to the deal say UK bidders offered higher prices for the icon, but Schroders won the day with its reliability in closing transactions swiftly.
Most of the European exits came from natural causes – such as the winding down of funds – rather than opportunistic sales. But the fact remains that European investors seem to have placed themselves well at low points of the cycle, and are now reaping big rewards from the less-adventurous UK institutions.
And despite the impression given by these headline deals, overseas money is not exactly fleeing the North West. Foreign buyers increased their market share modestly last year, from 19% of the total in 2013 to 20% in 2014, according to Savills’ figures. But they paid steeply for the privilege – nearly doubling the price paid from £350m to £613m.
Instead, this market share has come at the expense of more opportunistic owner-occupiers and private purchasers buying in the depths of the downturn. New investment from these sources has now nearly dried up: across the North they made 10.8% (owner-occupiers) and 10.9% (private purchasers) of acquisitions in 2013, according to Savills. By 2014 this had shrunk to just 2.5% and 2.8%.
So it is less a case of foreign buyers selling up and more one of diversification away from the trophy stereotype, into the more-imaginative investments – which is what Manchester trophies looked like a few short years ago. For example, a discount retailer’s shed in Merseyside is poised to sell at a steep price.
Meanwhile, the biggest North West office investment so far this year has been US investor Starwood Capital and international equity fund manager Trinity Asset Management’s £55m purchase of the Sandcastle in Liverpool. And in Manchester core, the first Chinese developers are expressing interest in prime development opportunities, such as the BBC site on Oxford Road.
JLL capital markets director James Porteous thinks the different investment strategies behind the two buyer types mean institutions can pay more for low-returning assets. “Overseas buyers are still bidding but they’re not as keen as institutions, who probably understand the local market a bit more. They see the occupier recovery first hand, rather than hearing it from an adviser, so they feel a bit more comfortable.”
Whether or not they’re paying over the odds, institutions remain willing. Activity may have died down at the start of 2015 in the face of a dearth of stock, but appetite has not: hungry investors are now aggressively approaching landlords off-market. Agency eyes have been firmly turned towards Invesco’s One New York Street and the Bank of Ireland’s 58 Mosley Street, and even some flagship developments that aren’t even fully let yet – such as Argent’s One St Peter’s Square.
The truth is Manchester is running out of trophies, which will test the depth of demand. Will institutions follow foreign buyers into more-imaginative investments once again, or will they simply look for investments of scale in other cities? That will be the question that determines whether the Manchester investment market can live up to its bumper 2014.
