It is happening. What at first was just conjecture, perhaps rhetoric and a tiny bit of hubris from local agents, actually seems to be coming true. International investors are shifting their attention away from overheated London in their search for prime assets, and Manchester, the home of Manchester United and Manchester City football clubs, seems to be firmly on their hit list.
In quarter one, every penny of investment money flooding into offices in the North West capital came from overseas, according to Jones Lang LaSalle.
Yes, this was in one big deal, the £142m purchase of One Angel Square from The Co-operative Group taken by a joint venture between German fund RREEF and Chinese investors, but it is part of a trend in which cross-border purchasers have taken over the Manchester offices investment scene (see chart).
Even deals that at first look thoroughly home-grown are being backed by foreign capital. For example, EPIC UK, which bought 1 The Avenue at Spinningfields for £20m, might be based in London, but the US fund draws on capital from around the world.
Many think investors have been drawn to the city in no small part by a global recognition that owes much to its two high-profile Premiership football teams.
“Manchester United is so loved outside the UK, especially in Asia, and now we have Manchester City up there too. Its like having an advertisement worldwide,” says David Pringle of Co-operative Estates, which sold the new Co-op headquarters building in Manchester.
The ownership of the two clubs gives Manchester immediate connections to the US, the Middle East and Asia. Manchester United is owned by the US Glazer family, while Abu Dhabi’s Sheikh Mansour bin Zayed Al Nahyan acquired Manchester City in 2008 from Thaksin Shinawatra of Thailand.
Manchester’s inward investment agency and UK Trade and Investment even sent delegates with both clubs on tours of China last year to try to translate that recognition into investment cash.
Whether there is a connection between that trip and the recent sale and leaseback of the Co-op’s One Angel Square is not established, but 49% of the building was reportedly sold to China’s Gingko Tree Investments. The other 51% went to RREEF.
Pringle says there was domestic and overseas interest in Angel Square and the deal “went to best bids and then best bids plus”. Having sought offers in the region of £150m, the Co-op accepted £142m.
“Manchester is on a very short list for international investors who, because of yield aspiration, can’t buy in London,” says Dan Crossley, of WHR in Manchester.
That yield gap can be significant, CBRE reported that prime office yields in London are around 4%. Compare that with 6.5% on Spinningfields, or even 8.75% on 100 Barbirolli Square in Manchester, and the draw is obvious.
So is this here today, gone tomorrow, when the next attractive return catches their eye? Hazel Ramsay of Savills thinks not. “There is good demand for prime offices from international investors. They are looking for long-term assets of 10 years or more, while UK institutions are interested in slightly shorter ones, mostly seven to eight years,” she says.
However, two deals, at Barbirolli Square and Bauhaus, are said to have been backed by international finance and both have major tenants approaching lease breaks. “These deals show the way the market is working,” says Matt Stretton of Cushman & Wakefield. “Barbirolli Square and Bauhaus didn’t get the price levels they were hoping to achieve last year but, having been selectively marketed this year, both have achieved the price the vendors wanted.”
Barbirolli Square, with tenants including Addleshaw Goddard, Ernst & Young and DLA, was sold by Scottish Widows Investment Partnership to a UK-based opportunity fund. The deal on the 140,000 sq ft building is thought to offer a yield of 8.75%, reflecting the fact that some of the tenants have imminent lease breaks.
The Bauhaus is said to have achieved a yield of 7.75%, due to the need for a refurbishment and relet. Agents say six bidders were chasing the 60,000 sq ft building, previously owned by Orchard Street Investment Management.
The wave of activity confirms the findings of Lloyds Bank’s latest Commercial Property Confidence Monitor that the North West is fund managers’ first investment pick after London. The survey found that 22% of fund managers thought the region offered the UK’s best investment opportunities, second only to the South East, which was favoured by 54%.
North West deals have included the Crown Estate’s purchase of the 145,000 sq ft Coliseum Shopping Park in Cheshire from Schroders for £81m and Capital and Centric’s acquisition of Churchill House on Tithebarn Street, Liverpool, from Derwent Lodge properties.
Despite this, industry experts are not ready to place any big bets that recovery is here to stay in Manchester.
“The premise is about calling the bottom of the market. It doesn’t matter what yields are if your capital is threatened. Signs are that we are close to that bottom point,” says John McWilliams of Lloyds. But he adds: “How many swallows do you need to make a summer?”
