2011 review: Outlook remains cloudy for commercial property

THE road to recovery for the North West’s property market looks set to be a long one.

Earlier this  year, BNP Paribas chief economist predicted that 2011 would be the lowest point in what was predicted to be a buoyant five-year cycle for Manchester’s office market, and although the city is performing better than most other regional centres, uncertainty at a macroeconomic level has meant decisions on the few requirements that are in the marketplace are frequently delayed.

Lambert Smith Hampton estimates that take-up of office space in Manchester for 2011 is likely to conclude at around 700,000 sq ft, which is not only 50% lower than last year’s figure but also the worst the city has experienced since 2002.

As a result, although many agents have predicted that the amount of Grade A office space is in danger of drying up, with no significant new space due to come onto the market in 2012, there are still large chunks of office space undertaken in the previous boom that lie empty, such as all of Carlyle Group’s Four Piccadilly Place, much of Number One First Street (which the City Council is set to vacate once the Town Hall extension works complete) and the former Halliwells headquarters at 3 Hardman Square.

David Thwaites of Lambert Smith Hampton argues that the current lack of development “is becoming an issue for those firms wanting to relocate or expand and grow in the city, whilst it may also deter occupiers from outside the region from opening or setting up in the area”.

However, dwindling supply at least means that rent levels are creeping up in the city, making it a more attractive market for investors than regional competitors.

Jonathan Mills, a Manchester-based director of Jones Lang LaSalle’s national investment team, said: “Office investment activity in Manchester continued to pick up over the year with around £140 million transacted across five deals in Q3 with UK purchasers accounting for 83% of investment volumes. Prime yields remain at 6%.

 “Given declining levels of office supply in the city, combined with the strengthening market fundamentals for prime space, prime office rents increased by 5.3% over Q3.

“The biggest concern for the UK market remains the restriction placed on transactional activity as a result of a lack of product. Competition for prime core in central London, and a lack of supply, has created a very competitive market that continues to price many investors out to the regions.

“Volumes in the North West will be limited by tight supply as opposed to a weakening in sentiment.”

Peter Vinden, managing director of Bolton-based surveyors The Vinden Partnership (right), said: “At the beginning of the year there was some optimism in the commercial property market, although that has now dissipated somewhat with fears that the UK is set to once again enter recession.”

Sean Beech, senior partner at Deloitte, said: “Another tough year is undoubtedly on the cards for the property sector, particularly in the North.

“While there are positive signs, the wider economic outlook is uncertain, not least due to the Eurozone crisis. While it will stabilise at some point, it is difficult to predict how it will unfold.”

He argued that the North West benefited from a number of positive factors that are not at play in other regions, such as the strong political leadership in Manchester that “has continued to drive regeneration and development in tough times”.

Indeed, there are a number of major schemes either already on site or moving towards it, in the city, which compensate somewhat for the general lack of development elsewhere. The biggest of these is the Airport City enterprise zone around the airport, for which a design competition is set to be held in the New Year.

Airport chief executive Charlie Cornish recently told TheBusinessDesk.com that he expects the site’s boundaries to be agreed soon, which will then allow it to pursue a planning application and to move on site with works within 2012.

The Co-operative’s £800m NOMA scheme is also moving on apace, with the £100m new headquarters building due to open in September and an application just approved for a £26m hotel to be built via a new tower emerging from the City Buildings site near Victoria station – the first of many buildings owned by the Co-operative within the area set to be transformed into new retail, leisure and residential space as it reorganises its estate.

At The Corridor on Oxford Road, the city’s efforts in attracting hi-tech science firms was also given a boost when Manchester Business School finally appointed Bruntwood as its developer partner for the first phase of its £60m campus transformation.

Similarly, approval has also just been granted for the redevelopment of the former Clayton Aniline site in east Manchester to provide a new 7,000-seat training arena and campus for Manchester City Football Club, and Realty Estates has been given the green light for its £35m redevelopment of Gateway House (right) next to the mainline Piccadilly rail station.

In Liverpool, Beech said there was also “a lot to be optimistic about, with Wirral Waters and Liverpool Waters in particular and a strong retail core that continues to grow”.

Although the Liverpool Waters scheme has become mired in the centre of a dispute with heritage organisations (particularly English Heritage and UNESCO), progress was made at Wirral Waters where the £175m Peel International Trade Centre not only gained planning but also a funding partner.

In Lancashire, Preston City Council suffered a blow when the retail-led £600m Tithebarn finally collapsed due to economic factors as opposed to any of the multitude of legal obstacles that were thrown at it. The city council has been working up plans for an office-led redevelopment of the centre, however, and has reportedly held constructive talks with Greater Manchester Property Ventures Fund about funding development in the area.

In Burnley, the city council got a couple of early Christmas presents in the form of an £8.8m grant from the Regional Growth Fund and the signing of an agreement to house the first University Technical College at Weavers’ Triangle. The RGF money will be used to reopen the Todmorden Curve track which will cut journey times to Manchester by half and place Weavers’ Triangle at the heart of development efforts.

Burnley Bridge Business Park developer Eshton Group also gained European funding for infrastructure works which should help move the site forwards next year.

In Blackburn, approval has just been granted for a £30m redevelopment of the Cathedral Quarter, while in Blackpool three schemes which make up the first phase of the town’s £220m Central Business District development have all been given the green light, allowing development partner Muse to plan a start on site in spring.

Salford Quays-based Muse was also chosen as developer partner on two major projects in Cheshire – a 500,000 sq ft new business quarter in Chester and a £130m mixed-use redevelopment of the Bridge Street quarter of Warrington town centre.

Looking ahead, John Ogden, who heads CBRE’s Manchester office, believes that opportunities for new commercial development in the city could be spurred by the fact that around 1m sq ft of leases held in the city by professional services organisations, are due to expire.

Meanwhile, GVA’s senior regional director Mark Rawstron believes that 2012 may be the year when banks begin to crystallise losses on schemes which remain under water and release some distressed property assets back onto the market.

“In my view, 2012 will see this start in a meaningful way but in the absence of bank debt, which has and will get harder, pricing will need to reflect the level of equity required to do property deals.

“Those with cash could see some real bargains as the year unfolds.”