Rising interest rates and bond market crisis lead to paper loss at Bruntwood

Rising interest rates and the bond market crisis led to a 17% decline in Manchester property group Bruntwood’s portfolio valuation, and a 12% decrease for Bruntwood SciTech, which subsequently resulted in a pre-tax loss of £224.3m for the year to October 2, 2023.

However, it said valuations across its portfolio compared favourably with those seen in some of the UK’s most prime markets.

The latest figures show gross profits at the property developer and investor increased 18% to £74.3m (2022: £62.9m), thanks to improved occupancy levels and rental growth across its UK-wide portfolio.

Operating profits increased 57% to £48.9m (2022: £31.1m) reflective of the growth in gross profit.

The group said the numbers highlighted the quality of its portfolio across its Bruntwood business and Bruntwood SciTech joint venture, which enabled it to attract and retain customers in the face of significant turmoil in the UK real estate sector and downward pressure on property valuations.

Bruntwood continued to invest in its portfolio, with £19.1m spent on refurbishment and capital improvement projects. It also invested a further £11.5m – matched by its partner Legal & General – into Bruntwood SciTech to fund growth within this portfolio.

Bruntwood SciTech, in turn, invested £18.2m in refurbishment and capital improvements and £62.1m in new development schemes.

The results cover the period up to 2 October 2023, pre-dating a £500m new investment into the Bruntwood SciTech platform, which saw Greater Manchester Pension Fund become a third shareholder partner and inject £150m new investment, alongside a significant increase in investment from existing shareholders, Legal & General and Bruntwood, through cash and asset transfer.

The £500m deal, the first of its kind by a UK local authority pension fund, was one of the largest single real estate investments of 2023. It makes Bruntwood SciTech the largest dedicated property platform serving the UK’s innovation economy, with £1.5bn in assets across nine campus locations and 31 city centre innovation hubs, offering 4.8 million sq ft of world class specialist workspace, support, and like-minded communities for 1,100 high growth start-ups, scale ups, and global businesses.

Following this transaction, Bruntwood was able to strengthen its financial position as it repaid £170m of debt and created headroom in its banking facilities to be able to refinance its £91m six per cent retail bond which falls due in February 2025.

Looking ahead, Bruntwood SciTech said it is focused on the delivery of a secured 3.6 million sq ft development pipeline which will expand and redevelop its existing science and technology campuses and city centre innovation hubs, delivering much needed additional world leading lab and office space in Manchester, Birmingham, Leeds, Liverpool, Glasgow and Cambridge, to support the UK’s target to become a global science and technology superpower by 2030.

This year is set to see the completion of the first phase of the Birmingham Health Innovation Campus and redevelopment of West Village in Leeds, topping out of No.3 Circle Square and Citylabs 4.0 in Manchester, and getting under way with several new developments – the third phase of Manchester Science Park’s one million sq ft masterplan – Greenheys, redevelopment of the iconic Met Tower in Glasgow into a tech hub, and a major refurbishment of the city centre innovation hub Pall Mall in Manchester.

This follows significant milestones during 2023, including the formation of a new joint venture with Aston University and Birmingham City Council for the 49-acre Birmingham Innovation Quarter, the approval of the strategic regeneration framework for the £1.7bn ID Manchester in partnership with The University of Manchester, completion of Enterprise Wharf at Innovation Birmingham – doubling the size of the tech campus, completion of the Grade II-listed former Victorian bank Bond in Manchester, and commencing construction on No.3 Circle Square and Citylabs 4.0.

Bruntwood’s remaining sole-owned £260m portfolio of workspaces, primarily located in suburban town centres, alongside a £100m portfolio of town centre regeneration projects with Trafford and Bury Councils will continue to progress and see expansion and refurbishments in 2024.

This will include working in joint venture with Trafford Council to complete the redevelopment of Foundation, the former Rackhams building in Altrincham, along with enhancing the public realm in the Stamford Quarter.

Further phases will be brought forward in the Stretford town centre redevelopment.

Concurrently in Bury, in a joint venture with Bury Council, it will submit its Mill Gate Regeneration Framework to cabinet and, if approved, further development planning applications will be submitted. Additionally, a suite refurbishment across the portfolio is under way to meet the rising demand for flexible workspaces.

In the 2023 financial year, Bruntwood, in a joint venture with Trafford Council, began the major redevelopment of Stretford town centre, the first part of the project being work on King Street to create a new look high street for the town.

The business was also granted planning approval for a residential scheme at Lumina Village which has now begun on site following two major funding agreements, with Moorfield and Clarion Housing Group, totalling £170m. A comprehensive refurbishment of the three-storey Halyard Court building in Salford was completed, and a refurbishment scheme across the portfolio enabled the business to expand its serviced product offering.

Bruntwood and Bruntwood SciTech CEO, Chris Oglesby, said: “These numbers represent our historic business structure prior to the major changes to the size and shape of our respective portfolios created by the £500m investment and welcoming of a new shareholder, and are a snapshot of UK real estate during one of its most difficult years in recent memory.

“But despite us seeing a paper loss created by some sizable valuation shifts, the performance of our portfolio didn’t waver, with our gross profit performance pointing to the continuing appeal of our modern, world class workspace, retail space, and specialist facilities for tech, life science, and innovation-led companies of all sizes.”

He added: “As a long term, patient capital operator we have never judged the success of our business on the mark to market valuation shift over a 12 month accounting period, but instead, the impact of our investments into communities over many years. On that measure, we are pleased to have met a number of significant milestones in 2023.

“We’re now a quarter of the way into our current financial year following the investment deal and with GMPF as our new JV partner in Bruntwood SciTech.
“While being prudent about what we deliver and when, as both the real estate market and wider UK economy remains fragile, we continue to have confidence in the strength of our products, the sectors we are invested in supporting, the opportunities within our growth pipeline, and will continue to build and invest in our towns and cities into 2024 and beyond.”