The Subplot | Down with skyscrapers, market failure, retail bargains

Welcome to The Subplot, your regular slice of commentary on the North West business and property market from Place North West.

THIS WEEK

• Peak skyscraper: is the end in sight for Manchester’s skyscraper development scramble?

• Boris and social care: market failure means the North West is badly served by the care home development sector

• Retail property is back in fashion: income plus residual value equals happiness

ALL FALL DOWN

The beginning of the end of Manchester’s skyscraper boom

Goodstone Living, the new £1bn BTR operation funded by Australian giant Macquarie Group, says it isn’t buying into Manchester skyscrapers. Is the tide turning against high-rise living?

The past five years have seen skyscrapers sprout all over central Manchester and Salford. Blocks of 50-storeys or more are no longer novelties, and the summer saw another crop cleared by planners. Renaker, which has led the skyscraper building boom, are about to submit SimpsonHaugh’s plans for four towers ranging from 39 to 60 storeys at Trinity Way. A few weeks ago Great Jackson Street Estates, controlled by Salford-based investor Aubrey Weis, won approval for Hodder + Partners’ twin 56-storey towers at Great Jackson Street (pictured). Surely this is a market showing no signs of slowing?

Meet the rethinker

Talk to Martin Bellinger, Goodstone Living founder (and BTR pioneer from his Essential Living days) and you begin to wonder if the end might be in sight. Goodstone’s reasons for steering clear of towers are illuminating, and suggest something of the kind might be happening. They boil down to standards and branding, and the shorthand for both is ‘quality.’

His proposition

Goodstone sees itself as a pioneering ‘third generation’ BTR. Ten years and 140,000 apartments on from the birth of build-to-rent, Bellinger thinks operators and the investors that back them are beginning to refine the product. As one of the fathers of BTR he should know. Out goes a lot of high-profile amenity provision, in comes a firmer focus on creating a home, he says.

Homes matter most

“We’re trying to bring BTR back to the product, which is a home, a place people want to call home, a place people want to – and aspire to – live in, concentrating more on the home rather than engaging in an amenity arms race,” says Bellinger. Piling on the amenities without perhaps considering the amount of uptake of those amenities, and the maintenance and operation costs, is not the Goodstone way.

Towering folly

Because Goodstone is thinking about homes, it doesn’t like skyscrapers. “Recent planning consents in central Manchester seem to have largely followed a type, which is a significant tower on a very small plot. These typologies don’t tend to lend themselves to our design principles,” says Bellinger. This means fire safety and plot density. Says Bellinger: “We’re at the forefront of designing for fire safety, including a second means of escape. We don’t intend to design in any other way. And these Manchester towers also often don’t have much usable outdoor space, and that’s a priority for us because we want to deliver for the wellbeing of the residents. We think wellbeing is going to be increasingly important to residents in their homemaking decisions.”

Who do they mean?

“Yes, Manchester is an attractive target for us. We may have to find a plot ourselves and bide our time and wait for the right thing to come along, and we’re prepared to do that, so that if our next acquisition has to be somewhere else, it will be,” says Bellinger. “Manchester has a brilliant BTR market and the Goodstone product would be incredibly well-received there. But I’m not in the business of compromising on quality or our design principles. I’d rather stick to our guns.”

‘No thank you’

More generally, Goodstone doesn’t sound terribly impressed with the sites and ready-to-build schemes it has been offered. “When we’re looking at site acquisitions, we’re looking at whether it will suit our design philosophy, whether the transport and facilities are good, and above all whether we can create our type of sustainable and innovative customer experience,” says Bellinger. “We’ve seen an awful lot of sites in the last six months which we simply passed on, because they might be good for other BTR developers, but we know they don’t fit with our aspirations, and can’t be made to fit at reasonable cost.”

I said ‘no thank you’

“There’s a lot of people at the moment who are around the market, with consented or soon to be consented sites, that are looking to find an investor, and a number of these schemes are superficially attractive on location, financials, and other metrics – but the thing we have to be wary of is that despite the on-paper attraction, we stick to our design principles,” Bellinger insists. “And that’s always difficult, it’s often hard to say ‘thank you but no thank you’ when someone holds you an open bag of toffees – the temptation is to take one – but we have to stick to our guns. We’ve got to stay focused. The important thing for us to remember is the residents will be in our communities for 10, 15, 20 years and investment decisions have to be predicated on that. BTR is the opposite of short-term thinking.”

Others will follow

Is Goodstone an outlier? Certainly not. Adam Brady, executive director of HBD, says: “The viability of skyscrapers in Manchester has always been marginal at best, for any use – the economics, driven by demand and shortage of space, don’t add up in comparison to capital cities like London. As a BTR product, skyscrapers also pose additional challenges – it can be more difficult to create an identity and a community, including outside amenities. You also run the risk of ending up with a lot of identikit product which potentially limits your market and your ability to drive rents, which will then be less attractive to investors.”

On the other hand

JLL’s Stephen Hogg takes a different view. “The biggest threat to the supply of residential to the city is land supply and planning. Skyscrapers have proved to be incredibly popular with the Beetham Tower standing the test of time and many apartments having been refurbished to a fantastic standard and trading well. Renaker, the skyscraper king, has had great success at Deansgate Square and Greengate with more in the pipeline. Buyers will always buy height and as long as prices keep pace with build costs then I see no reason as to why we will not see more,” he says.

Money talks

Investors are still very much engaged with Manchester BTR (and PRS). It will be interesting to see what they buy, and at what kinds of prices and yields. Last week’s sale of Moorfield Real Estate’s 232-unit low-rise Trilogy development to Barings for £53.5m is hardly proof that investors have turned their back on towers. But it is a straw in the wind, a wind gusting at gale force thanks to the volume of money looking for a home in the city. Tom Cressey, real estate partner at JMW Solicitors, says: “Land prices in Manchester have remained strong, so even with high build costs the economics continue to support building upwards. Rental growth over the past 12 months evidences the lack of supply, and we are still seeing sales to BTR investors at very sharp yields.”

Also this

Meantime, non-BTR tower development depends on two main variables. First, the willingness of buy-to-letters and owner-occupiers to buy into leasehold. Given the post-Grenfell cladding scandal, leasehold no longer looks like a good bet (and maybe looks like a scam).

We’ve reached peak skyscraper

Second, the willingness of Manchester City Council to grant consent. Plonking mighty towers down everywhere has not been popular with the Labour backbenchers, nor has the leadership’s scowling approach to doubters. Sir Richard Leese’s replacement might think bending to the wind on tower policy was a low-cost and (noticing Goodstone’s views) market-friendly way to mark the new regime.

Conclusion: the Manchester skyscraper surge is not over yet. But investor pressure may mean the rate of growth slows ahead of a market rebalance.

DRIVING THE WEEK

Boris’s social care fix

There are good grounds for doubting that raising National Insurance contributions will help solve the long-standing problem of social care for the elderly. But it is certain that the health care property business is due for disruption, particularly in the North West.

Research released last Thursday into the health care development sector paints a grim picture. In the last decade, the UK’s over-65 population has grown by 22% yet the number of care home beds has risen by only 6%. As needs have risen, development has stalled. Knight Frank calculates that total care home beds across the UK grew by a shameful 0.1% in the past year. Today we have 480,072 beds across 12,034 care homes, and while it has been a funny year this sluggish development pipeline is part of a longer-term market failure.

Drop in the ocean

As the pandemic eases, and developers rediscover their confidence, supply will nudge up a little. Knight Frank says the pipeline of new beds under construction, in planning or out for construction tender, is about 17,000. The 2021 output figure will be double that of 2020. But there’s a big, big but here.

Market failure

And it is this: the market is not serving the public interest. The supply pipeline is still a drop in the ocean of need, and does nothing to make up for the massive shortfall in development over the last decade. It’s simple logic that a sustained lack of supply helps push up prices, and the major developers and operators are in no hurry to screw up their market advantage.

Posh towns only

Developers are really only interested in the premium end of the market focused on London and the South East, as Knight Frank’s analysis of development hotspots shows. The North West misses out. For instance, the West Midlands’ pipeline provides nearly three times as many new beds, per head of population, than the pipeline in the North West. Yorkshire does better too. Posh places get new care beds, less posh do not, and the North West is among the worst served of all, per capita. Your gran in Blackburn? She can forget it.

More to come

And if the market is failing now, it is going to fail on an epic scale in a few years’ time, as the demographics shift. The population of over-85s is expected to more than double to 3.7m by 2050. Your correspondent hopes to be one of them.

The options

Knowing this, and seeing the regional disparity, a “Levelling Up” government will soon be forced to act. Newly installed levelling up boss Michael Gove has control of the planning system and that could be significant. The Competition and Markets Authority recommended in 2017 that local councils have enhanced powers to plan and make land available. These concerns haven’t gone away as Subplot reported earlier this summer (27 July). Knight Frank points to the difficulty of securing bank lending for care home projects, and the government will want to look at this. Easing use class rules and permitted development rights might help at the margins. But ministers will soon be forced into considering something more radical. Gove is known for his radicalism.

As Knight Frank points out, the UK elderly care market is at risk of reaching capacity by the end of the decade. No government can let that happen and the focus on market failure, particularly in regions like the North West, can only grow.

IN CASE YOU MISSED IT…

North West retail property is hot

A £95m deal this week, a £33m deal last week. Everyone is buying into North West retail. Why?

Peel L&P sold the 143,000 sq ft Trafford Retail Park for £33m. On the face of it this is an odd decision for Peel. Why buy into the dubiously sustainable showbiz world of traditional shopping centres at Barton Square (£50m price tag) and yet sell out of the currently super-hot and fairly safe world of retail parks? For the new owner, UK Commercial Property REIT, the appeal is more obvious and boils down to £2.5m a year in rent as part of a diversified portfolio.

Can’t get enough

Just 24 months ago investors thought retail parks were as attractive as asbestos or flood risk. Today everyone fancies they’ve spotted a chance. Brookfield, the Canadian giant, has piled in, always a signal to the market that something is on the turn. This is because retail park net asset values (NAVs) are rising, and rising by a bouncy like-for-like of 3%-5% a year.

Residual value

Among the other lovely things about retail parks is the yields are good (6%-7%-ish) and the tenants (having survived a retail Armageddon of their own in the last decade) are weatherproof. Best of all, if it goes belly up and retail parks fall out of fashion again, you’ve bags of residual value because large flat sites close to main roads and urban areas are ideal for last-mile logistics or residential. No doubt something like this figured in the UK Commercial Property REIT appraisal: 12 acres close to junction 10 of the M60 is never going to be unwanted.

Also supermarkets

A different but equally powerful set of considerations is encouraging investors into supermarkets. Yesterday Supermarket Income REIT plc bought a clutch of North West supermarkets including the 7.5-acre site of Prescot’s Tesco (£50m), Morrisons in Workington (13.7 acres for £28.9m), Aldi in Oldham (£5.6m) and the Aldi and M&S Foodhall in West Derby for £10.2m.

Also residual value

The deal here is fixed uplift on rents, often with 10-15 years of unexpired leases, which these days is pretty much investor catnip. Confidence that retailers will survive is high, thanks to improved margins for online grocery. The risks that the competition authorities, or mergers and acquisitions, prompt rationalisation of sites is mitigated by the urban logistics and residential residual value.

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