Earlier this month, professionals from across Manchester’s built environment gathered for EG’s latest Cities lunch at the 20 Stories restaurant to discuss the development market in and around the city.
There was an air of optimism at the table despite economic uncertainty – Shoosmiths partner Patrick Duffy opened the discussion hailing a “buoyant” market for dealmaking, even if transactions are taking longer to get across the line.
Overseas investors are increasingly keen to look at retail assets that could offer scope for redevelopment as residential or other uses, he added.
But as the conversation developed, the risks ahead became clear, including a shifting funding market, demands from new demographic trends in the city centre’s population and the need to rethink old ideas of what residential schemes can and should offer.
Here are some takeaways from the conversation.
Funding there, but viability stretched
Heath Thomas, head of real estate and housing finance for the North at NatWest, said living sectors such as build-to-rent, student accommodation and retirement living are all in favour for financiers. But yesterday’s price is not today’s price.
“Ultimately, the rates will have an impact in terms of viability and affordability,” Thomas said. “If you had a £50m loan this time last year on a 2% margin, you were probably paying around £1m a year in interest. Now you are paying nearer £4.5m.
“Even if you are within all your covenants and everything is going well, that is a huge amount of additional costs for you to swallow, whether it’s in the development space or the investment space.”
Thomas believes there is still “denial” in the market over where rates will end up. He said: “Even back in March, people were saying the landing point for interest rates is going to be around about 4.25% to 4.50%.
“Now, the collective voice of the market is that the landing point is anything between 5.75% and 6%, and that it’s going to stick at a higher level for longer. That has quite fundamental implication of people’s appraisals.”
Shoosmiths partner Liz Sweeney is already seeing the effect. “Given the interest rate spikes that we have seen, last autumn we had a wave of amendments and waivers to covenants [from deals signed two or three years ago],” she said.
“We are seeing the second round of that now. We are also seeing loan-to-value breaches – lenders usually have the right to call for a valuation annually and they have not necessarily done that.
“But high street lenders that are subject to slotting [regulation] are calling for those valuations, and that is causing some issues. The borrower is servicing the debt but is in technical breach of some of their banking covenants. That is creating some nervousness in the market.”
Resi is proving resilient
Developers believe the city’s residential sector has shown its stability throughout ups and downs across cycles.
At Vita Group, which develops BTR, student accommodation, retirement space and co-living schemes, director Giles Beswick is confident that young people typically view renting “purpose-built, professionally managed property” as better value for money than their alternatives.
“That is a long-term mega-trend which will survive the short-term inflationary pressures,” he said.
“All of these overseas investors want long income, and what better long income than buildings that have five years’ track record of being 100% let?
“If you look at the student sector, for example, even during the pandemic, when most university courses were shifted to online, we were still probably 75% occupied.
“That is a pretty resilient sector to put your money in. That is helping to promote optimism about the strength of the market, notwithstanding some of these short-term issues around funding stuff and refinancing stuff.”
But for Steven Knowles, director of development management at Muse Places, the growth of city centre living brings its own challenges as new districts are formed – and if those challenges are not addressed, he warned, further investment could yet be lost.
“People are saying, ‘how do we accommodate everybody in the city centre?’” he said. “Well, what I think is happening in Manchester is it’s pushing out, creating all these different districts. The challenge for Manchester is how we connect it transport-wise. If you think about the walk from Salford to Piccadilly, it’s 35 minutes.
“The failing that we made going back 20 or 30 years is that we should have had an underground system, and that would have connected a lot of districts in and around Manchester. It’s going to constrain development now.”
Shifting demographics and tenures
Shannon Conway, residential director at Glenbrook, the company behind the Lumina Village scheme in Trafford, said an affordability “crisis” will encourage more people to rent, and reshape the kind of offering BTR providers must bring forward.
“We are heading to a point where kids can’t get mortgages and older people can’t get mortgages either. Renting is going to be the only option, or staying at home,” Conway said.
“There is a trend now in build-to-rent of people sharing. People who used to get two bedrooms and one was a study, that has gone. Co-living is going to come to the fore and really perform in that sector. We need to start looking at really good-quality rental products as developers. Rent is here to stay.”
At Capital & Centric, development manager Emma Cooper said the company has long espoused the value that comes from embracing all types of tenants within one scheme, to the point where some industry terminology, in fact, sounded alien to her and the team.
“We don’t discriminate against age. We build communities. I had to Google what ‘senior living’ was,” she said.
“The definition that [developer] McCarthy Stone used was people over 55, which really shocks me – the thought in 15 years’ time of being segregated and being classed as an older person horrifies me.
“If you have a good community manager that is inclusive and does not see age in that building and delivers the same service to every person, you should never have to segregate them.
“It’s about delivering high-quality, well-designed buildings that everyone can live in. A well-designed building should not discriminate against age.”
Room for reinvention
The newest scheme represented at the table was St Michael’s, a mixed-use development from former footballer Gary Neville’s Relentless Developments.
The residential offering at the £400m scheme is coming in a later phase, but chief executive Anthony Kilbride said he was adamant that it will bring something new to the city centre, alongside a hotel partner (Kilbride shied away from naming the partner ahead of a deal being announced, but it has been widely reported as W Hotels).
“We always set the ambition for that site to deliver experiential living,” Kilbride said. “There are so many amazing schemes out there, but we wanted to create a product that doesn’t yet exist in the city. That scheme is partnered with a hotel operator to deliver branded residences, which will be the first in Manchester.
“There are a fair few in the US and in Europe, but there are not too many in the UK. So, it’s a bit of a risk because we don’t yet know how it will perform and how it will be received by the market, and we needed to find a like-minded partner. They are coming on the journey with us.”
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