There’s a new developer on the block: well-funded and ambitious, it has just unveiled a 352,000 sq ft speculative office development pipeline in central Manchester.
Who is it? Salford council, which is taking an unprecedented £200m gamble on the city’s development scene.
If it pays off, it could fundamentally change the way local authorities interact with the property business.
Until now, councils have contented themselves with investing in finished properties, turning developer only when the market has failed. In Derby, Cardiff and nearby Stockport, local authorities have been the office developer of last resort because nobody else wanted to take on the risk.
But in no way can Manchester’s city centre office market be called failing. That’s why Salford’s decision to throw its weight – and its unmatched capacity for low-cost borrowing – behind two mighty developments is causing ripples of alarm.
The list of concerns runs from the risk of self-harm (if the gamble fails, Salford will be left out of pocket and the market oversupplied) to indignation (Salford’s schemes could snatch tenants and extend void periods at rival privately funded speculative schemes).
Salford’s directly elected executive mayor, Paul Dennett, is unapologetic about the council’s decision to become a major league property player at Two New Bailey and 100 Greengate (Embankment).
An anti-austerity campaigner with a business-oriented background – he worked for the chamber of commerce and was a lecturer at Manchester Metropolitan University’s business school – Dennett is a name to watch in Manchester’s Labour-dominated politics. He was chosen by Metro mayor Andy Burnham to rewrite the controversial Greater Manchester spatial framework and is his deputy mayor for economic growth.
Funding cuts
Dennett says Salford has to raise more money to make up for huge government funding cuts (government funding has halved since 2010). And since it had commercially valuable real estate on its doorstep, why not turn developer? Not only will there be development profits, rental income and, perhaps one day, an investment sale, there is also the long-term income from retained business rates.
“We have a real opportunity here at two key sites – one next to Spinningfields, the other next to Manchester Cathedral – and both had success at their first phases signing deals with Freshfields [which took 80,000 sq ft at One New Bailey] and Swinton Insurance (165,000 sq ft at 101 Embankment], so the decision to back these schemes is a continuation of what we have already started,” he says.
We have got proven locations that would attractg funding. We would probably look to overseas private equity, which predominantly means Americans. And there’s enough of them looking at Manchester to make it competitive”
At Two New Bailey the council has taken a 25-year head lease, sharing the development risk, says Dennett.
At Greengate it will probably build directly from its own resources, either using capital reserves or borrowing from other local authorities at rates at or below 1%. The deals also stipulate local jobs in building contracts and local job targets for occupiers.
“We are not looking to sell the completed investments, certainly not in the short-term,” says Dennett. “If someone came along and offered us a significant sum, obviously we would consider it seriously, which opens the prospect of using the proceeds as revolving finance, like Manchester’s £300m housing fund, to kick-start other property schemes.
“We have to be enterprising. We have lost £186m from our service budgets and the government is telling us to grow and develop our economy and this is how we are doing it, but entering a hitherto private sector market. We have come to the party a little late, I suppose, but now seems the right time.”
Resilient market
He believes Manchester is the most resilient market outside London. “The returns in Manchester are good, it is a stable market, now is a real opportunity for us,” says Dennett, talking like a big-time property developer, which, in fact, he is.
Rent and business rates combined on the two new buildings will produce almost £4m a year for Salford council. After tax, the council takes home £2.2m.
There’s no doubt in the minds of most observers that both the Two New Bailey and Greengate schemes would have won private sector funding if Salford hadn’t grabbed the opportunity. Recent speculative funding deals include Barings Real Estate Advisers’ commitment to the 180,000 sq ft Landmark development in Oxford Road, a scheme with an end value of £100m.
Nick Okell, associate director at Savills in Manchester, says while the market for speculative funding in the city has narrowed, thanks to build costs inflation and late-cycle risks, there are still enough players to make it interesting.
“Both sites have a track record, with successful first phases, so we have got proven locations that would attractg funding. We would probably look to overseas private equity, which predominantly means Americans. And there’s enough of them looking at Manchester to make it competitive,” Okell explains.
Last year, when the public sector threatened to intervene in Cardiff’s office market it caused a mighty and angry backlash from developers and agents.
Appraisals at the two Salford sites are said to suggest rents around £24-25 per sq ft, a comfortable discount on Manchester’s prime £34-35 upwards. Salford could probably expect headline rents a little above appraisal levels – high 20s, say the wise owls – but it is still undercutting the city core.
It’s a win-win situation for the city centre, hopefully attracting more businesses, creating more regeneration and providing a catalyst for further development”
So do Manchester developers and investors feel robbed by Salford’s decision to use its muscle (and cheap money)?
Chris Mulcahy, head of office agency at JLL, says Salford’s decision is nothing to worry about because it is slightly off-pitch.
“The edge-of-CBD schemes, to a certain extent, appeal to a slightly different market to the prime schemes and are, in the main, complimentary to other developments,” he says.
“It’s a win-win situation for the city centre, hopefully attracting more businesses, creating more regeneration and providing a catalyst for further development,” he adds, pointing out that some other Manchester schemes have benefitted from public sector funding or grants.
A question of risk
There is still the question of risk, as one agent who did not wish to be named points out. “Salford could be falling into the trap of thinking property is a license to print money, and its previous success at Greengate and New Bailey could be leading it astray. It could make a lot or lose a lot. I hope it doesn’t make a habit of this kind of risk-taking.”
A senior source in the city’s development scene added: “Salford does have a stigma and will not attract speculative corporate or private finance, and will only be able to develop from a base of significant prelets and, I am not sure they are there for Salford.”
However, they warned Manchester’s market is by no means as strong as it seems, with few big professional occupiers in the market and short-dated tech lettings unlikely to fill the voids in speculative schemes.
So far the Manchester property market is relaxed about Salford’s 352,000 sq ft market intervention. But if the market turns tough – and private developers face even longer void periods while Salford’s schemes fill up – that relaxed mood could quickly change.
Who, what and where
Plans for the 190,000 sq ft Two New Bailey were approved last October. The building, designed by architects Allford Hall Monaghan Morris, will be next to the recently completed One New Bailey development. The block is the home to London law firm Freshfields Bruckhaus Deringer and restaurant Menagerie. The developer is the English Cities Fund.
An application to build a nine-storey office block at 100 Greengate was submitted to Salford council in April 2016 by Episo 3 Oasis, a company registered overseas. The application was for 208,000 sq ft, larger than previously applications for the site dating back to 2010. A decision notice approving the scheme was issued in February.
Salford guaranteed half the rent on the first phase at Greengate Embankment, a risk valued at £15m. The council was a development partner at One New Bailey.
