Given half a chance, several developers would push the button on speculative office schemes in central Manchester.
At first glance, it makes sense. CB Richard Ellis’s calculation of grade A availability at the end of 2010, at 625,000 sq ft, might sound substantial, but city centre take-up last year was 1.35m sq ft, of which 650,000 sq ft was for prime stock.
Rents also look inviting. Hitting a high of £29 per sq ft last year, albeit propped up by incentives, the city looks a better option than alternatives such as Birmingham and Glasgow, which reached £28.50 per sq ft and £27 per sq ft, respectively.
GVA director Chris Cheap says: “There is 350,000-400,000 sq ft of live requirements, but the issue is the pipeline.”
Colliers International director Rupert Barron adds: “Manchester is not in the same position as other regional cities, with a hangover of stock, so there are opportunities for new-builds, if developers can get schemes to work.”
It is a big “if”. Lenders are willing to back only the most de-risked projects. Nothing will be built entirely speculatively, and despite agents’ claims about the strength of demand, it falls to developers to sell the dream of their individual projects to enough prospective tenants to make them viable.
As a result, few expect partially speculative schemes to be started this year, but developers are desperately trying to be first out of the traps by making their proposals stack up.
“In light of 2008, debt leveraging is virtually non-existent,” says Ken Knott, chief executive of Ask Developments. “If you have a scheme that is less than 50% income-secured, I don’t think you’ll find development finance. To get in play, ideally, you need 60-70% to be prelet.”
At this year’s MIPIM property festival, Ask launched plans for 1.25m sq ft of offices at its First Street campus, but its short-term focus is the £350m Greengate Embankment scheme, which although technically in Salford, will effectively sit in central Manchester, near Victoria train station.
Ask recently struck a deal with Salford council under which the local authority has guaranteed 50% of the rent of a 196,000 sq ft building without occupying it in order to provide Ask with a selling point for potential funders.
“If we can work with the private sector to bring forward development, we should,” says council chief executive Barbara Spicer.
It is reminiscent of Manchester council’s purchase of the freehold of land at Allied London’s Spinningfields last year on the proviso that Allied builds 580,000 sq ft of offices and ancillary retail on it by 2015. Some question the ethics of local authorities intervening in this way; others tip their hats to the developers involved.
Allied is understood to be in the latter stages of securing a much sought-after 180,000 sq ft prelet to Lloyds Banking Group, with the aim of creating a 325,000 sq ft building at Spinningfields. Agents will watch with interest to see whether potential investors judge the letting to be sufficient to press ahead with the project.
Also chomping at the bit are Argent and the Greater Manchester Property Venture Fund, which aim to build the 270,000 sq ft One St Peter’s Square. With GMPVF money in theory partially behind it, agents say it stands a chance. But again, the developers need prelets. It is being linked to KPMG’s 70,000 sq ft requirement, which is also being chased by others, including Ask at Greengate Embankment.
David Porter, head of Knight Frank’s city office, says: “The fear factor for developers is that if they don’t do something soon on the back of a part prelet, they’ll miss the boat,” before adding a call to arms worthy of the SAS: “Who builds first will win.”
Peter Skelton, head of Lambert Smith Hampton’s Manchester office, adds that schemes stand a chance only with carefully considered financial backing: “The next generation of buildings will be done by institutions that have cash and are long-term holders of property. I can see firms like PRUPIM, which has plans for a scheme at Brazennose House, committing.”
For the time being, the only din of construction on an office scheme is The Co-operative Group’s 328,000 sq ft prelet to itself at NOMA, its freshly-branded 25-acre site. The group announced at MIPIM that it too is investigating ways to spark further office development at the scheme, by pitching for property companies to partner it.
It does not take a genius to figure out that new office space in Manchester is a good idea. It might take a genius to actually turn a proposal into reality.
Will refurbishments mop up?
As the volume of new-build office space in Manchester’s traditional city core diminishes, will high-quality refurbished buildings benefit?
So far, it has not necessarily been the case. Will Lewis, partner with OBI Property, explains that city centre take-up last year was skewed towards the new-build grade A and secondary tiers of the market, with “grade A” refurbishments missing out.
Softer rents and greater incentives at new-build stock made it available to occupiers that could not previously afford it, he says.
“Occupiers will be forced to consider the highest quality refurbishments,” says Lewis. “However, at certain schemes, landlords have slashed quoting rents. Whereas we had hoped that the market would strengthen, such moves might throw it out of kilter.”
In some cases, landlords of prime refurbishments that were completed at the height of the market had hoped to achieve rents in the high £20s per sq ft. Now, at schemes such as Property Alliance Group’s The Pinnacle, asking rents are understood to be less than £25 per sq ft. And at the Universities Superannuation Scheme’s Observatory scheme quoting rents have reportedly dropped from around £23 per sq ft to £18.50 per sq ft.
One agent, who asked not to be named, says that if the owners of such buildings had “held their nerve” they could have met original rental aspirations.
However, market players remain confident that quality refurbishments will help to fill Manchester’s supply gap.
Manchester-based developer Bruntwood, the city’s largest commercial landlord, has made its name redeveloping existing buildings. Its chief executive, Chris Oglesby, says: “We have continued to refurbish throughout the downturn. If you want to let space you have to reinvest in it.”
To illustrate this, Oglesby refers to the City Tower building, the location of Bruntwood’s headquarters. Owing to public sector occupiers vacating, 14 floors are vacant and Bruntwood plans to revamp them and ask for £17.50-£19 per sq ft.
Wither demand?
The main office requirements in Manchester include Lloyds Banking Group, which is seeking around 180,000 sq ft, and KPMG, which would like 70,000 sq ft (see main text), while law firm Pannone has a requirement for circa 85,000 sq ft. Beyond that, few names are bandied around the market with any certainty.
Spanish bank Santander and accountant PricewaterhouseCoopers are both said to have their noses in the market, but agents stop short of describing them as live requirements.
Nobody believes take-up in 2011 will match 2010’s 1.35m sq ft, but if it is to come anywhere close, where will the deals come from?
Tony Bray, head of Cushman & Wakefield’s Manchester office, says: “The average size of deal last year was 5,000 sq ft, and that part of the market is relatively resilient. There are 17 active requirements of more than 10,000 sq ft, as well as three of more than 50,000 sq ft.”
Upcoming lease expiries will be scrutinised. For example, several long leases at Barbirolli Square are due to expire in 2017. These are understood to include PwC and Ernst & Young.
“Around 950,000 sq ft of lease expiries to indigenous financial services and professional occupiers are due between 2014 and 2017,” says CB Richard Ellis director Will Kennon. “That’s the window of opportunity.”
But agents are only too aware that demand remains precarious. Insurance firm Royal & Sun Alliance was due to take 60,000 sq ft at The Carlyle Group’s Three Piccadilly Place until pulling out of the deal. “The offices viewed did not meet our specific criteria on this occasion,” said an RSA spokeswoman.
