The Subplot | Why the slow and steady Northern real estate market could be a winner

This month’s long read

• Why being illiquid is Northern property’s secret weapon
• Elevator pitch: your rundown of what’s going up, and what’s heading the other way

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Cold facts or ‘copium’?

There’s something stirring. Investment market data suggests Big Money is ensuring prime Northern commercial property has a tolerably good winter. The first green shoots of spring, proof that real estate never goes out of fashion, or something else entirely?

Trade wars, real wars, fragile growth, interest rates pretty much flat, inflation sticky, huge confidence-denting public spending cuts coming in March, plus an asteroid called 2024 YR4 at risk of dive-bombing the planet in seven years time. Happy days, eh? And yet at the same time, investment in prime Northern real estate is growing. UK investment volumes topped £50bn in 2024, up 23% on the previous year, and the data from the North’s big cities shows a market picking up speed at the end of last year. What’s going on? The answer: welcome to the world of the illiquidity premium.

Spend, baby, spend

According to the latest update from BNP Paribas Real Estate, total UK commercial real estate investment volumes reached £50bn in 2024, up 23%, thanks to retail investment having its best year since 2021, a 13% hike in industrial and logistics (more on this below), and continued interest in residential. London did well in all sectors, and offices didn’t manage too well anywhere. “Investors are increasingly aware of the inherent opportunity the UK’s leasing market offers to those targeting above-inflation income growth,” says Charlie Tattersall, Capital Markets Research at BNP Paribas Real Estate.

Getting better

Leeds and Manchester’s office markets – like office markets generally –  have been having a tricky time. Data shared by CoStar suggests that 2024 was moderately dire with total sales of £152m and £196m respectively, meaning they scored 46% and 33% of their five-year average. This is a poor showing. What’s interesting, however, is that it’s a poor showing that’s getting better. The fourth quarter showed sales across the big six regional cities that exceeded Q2 and Q3 combined, and puts things back into 2022-ish territory. There’s still a long way to climb back to the top of the market in 2021, but its hopeful.

Kerching

As if to prove the point, Tuesday this week saw Investec Realis and partners XLB buy the 47,000 sq ft Citygate office in Manchester for around £14m. The block is 90% occupied in a market with limited development and potentially rising rents. Investec’s Tom Punch called today “a highly favourable entry point” for UK offices. Read all about it here.

That premium feeling

Behind all this sits the illiquidity premium. Illiquidity – not being able to sell things quickly – is supposed to be a big issue, but for some investors, at some times, it’s a massive blessing in disguise, and potentially the North’s secret weapon.

Meaning what?

Illiquidity premium chat can get very technical, but the gist is: if you have deep pockets, like to mix and match your portfolio, and have a long-term outlook, the (relative) cheapness of assets that are (relatively) hard to off-load provides you with a real earning opportunity. When the gap between the liquid and the illiquid gets wider – because either one, or the other, has gone off the boil – the opportunity is that much more appealing. Private markets, private debt, and property are the big targets. The gap (the illiquidity premium) has been getting wider in real estate since late 2023, says Aviva, who you should check out for some nuance.

Hot in February

As it happens, all the signs are that the illiquidity premium is a big-turn on for investors in chilly February 2025. Once again, we turn to Aviva for the data because, they say, there’s a pretty substantial investor pivot to private markets, with more than half of institutional investors expected to increase their allocations over the next two years, and two thirds of them expecting private markets to outperform public. “The illiquidity premium is expected to become an increasingly important reason for allocating in the next two years,” said a report published on Wednesday.

Only one way to go

Whilst the office market is a slow-burn responder to the illiquidity premium, big sheds are moving a bit faster. Newmark’s Q4 UK Prime Logistics data shows build-to-suit activity by retailers and data centres driving a 15% quarterly increase in take-up, with overall demand including standing stock up 6%. Investment is growing to a shade under £8bn, up on 2023 but by no means a record-breaker. Take-up was ‘meh’ in both the North West (down 79% in Q4) and Yorkshire and the North East (down 54%). The only way is up, so US giant Trammell Crow Company has secured planning permission for a 480,469 sq ft logistics scheme in Heywood, and M7 Real Estate bought into the ever-green multi-let estate scene buying the Broadheath Network Centre in Greater Manchester for £47m from Network Space Developments. It bought for Australian mega investor Oxford Properties.

One thing or the other

The thing about illiquidity premiums in the real estate sector is that they tend to be strongly correlated to the bottom of the market cycle. The premium gets big and attractive when capital values fall, and dwindles when they grow. The vogue for illiquidity premiums can mean investors are hunkering down, preparing to weather the tough times. Or it can mean they are preparing for green shoots to start emerging. Or, most tempting of all, it could be both.

ELEVATOR PITCH

Going up or Going down?

A very good week for dead cats, and potentially an interesting few years for socially-minded pension funds. Welcome to the Place North Elevator. Doors closing, going up.

Unaffordable housing

Greater Manchester Pension Fund – a monster among defined benefit pension schemes – has invested £100m in a Legal & General fund to deliver much-needed affordable homes across North West England. The new regional vehicle is a structured extension to L&G’s flagship Affordable Housing Fund, launched in July 2024 to develop high quality, sustainable affordable housing nationally. It is tailored specifically for the pension scheme and would fit Merseyside and West Yorkshire’s Local Government Pension Schemes too.

Last month the L&G fund also mopped up £100m from London CIV, the investment pool for London Local Government Pension Schemes.

Third-party capital is still a novelty in this sector, but the scale of investment is growing. That pension funds see this as a safe and desirable destination for the long-term is sure to result in more development, faster. L&G has £1bn invested in affordable housing and over 8,000 homes in operation or development to date.

But pension funds aren’t charities – they have to make good commercial returns – and it will be interesting to see how far the social objectives of this investment mesh with the hard cold fiduciary duties.

Dead Cats

Hark, what’s that noise? The thuddy furry noise? It is the sound of a dead cat bouncing. The theory of the dead cat is that slamming down something eye-catching distracts from other embarassing problems you’d rather people didn’t talk about. In the world of economic growth, these are often controversial or aspirational zombie schemes like a third runway at Heathrow or, taking this local, getting Doncaster Sheffield Airport back on the flight path to success.

The closed and unprofitable airport, owned by Doncaster City Council, will stay closed unless the Council gives it a loan of £105m, which nets down to a £89.7m subsidy. Attempts to find a private business to take on the risk haven’t come to anything because the likelihood of viability is low. That the airport made £180m losses between 2004 and 2022 – and never turned a profit – suggests how serious the risk is.

Coincidentally, the £89.7m subsidy for a failed airport is just a cigarette paper away from the £90m that could have secured a significant new AstraZeneca vaccine plant for Merseyside. The £450m Speke facility, which would have helped vaccine production and given the region’s bioscience sector a massive boost, was eventually offered £80m, but that wasn’t enough. They walked.

Get in touch with David Thame: david.thame@placenorth.co.uk