Why It's A New Dawn For Manchester BTR

Manchester's rented residential market is undergoing a resurgence.

Investors are preparing a £500M surge into the Manchester BTR sector as it wakes from a cautious, sleepy 2019. At the same time, co-living is seeing a spike in interest from investors, even as local authorities consider regulating the sector.

The city has been here before: three years ago it led the expansion of BTR beyond London, before investors took fright at the prices being demanded for land. This time the expansion looks more sustainable. 

Manchester’s hectic city centre residential scene took a modest break in 2019 as Brexit uncertainty and sky-high land prices took their toll.

Now the market is back with a bang, a change in mood symbolised by LGIM Real Asset’s purchase of the 276 build-to-rent apartments in Renaker’s 37-storey North Tower, Deansgate Square. This is its second buy at Deansgate Square: LGIM bought West Tower, next door, for a price believed to be around £200M in a deal with Renaker in 2018.

There could be another £500M BTR deals to follow in short order.

At the same time a new front is opening up in the build-to-rent sector as co-living gets its first large scale Manchester outing. Downing has submitted plans for a 45-storey co-living tower at Manchester’s First Street. It plans 1,113 co-living apartments in various bedroom mixes, and 1,000 single-bed studios. Manchester City Council has already advertised its doubts about the co-living concept and the forthcoming planning battle will either set the stage for a co-living boom, or kill it.

Both moves come after an underpowered 2019 in the BTR sector. Manchester is the largest of the regional markets (accounting for about 17% of the 152,000 BTR homes in the UK, compared to about 5% in Birmingham and 3% in Leeds). Yet according to data from Savills the number of starts outside of London has roughly halved to 4,600 in the year to December 2019, the lowest since 2016.

Will 2020 be the year the market moves to the next level? If it is, it will be the investors that drive the action.

£500M Deals Mean Investors Are Back In The Game 

CBRE investment director Tom Sinclair worked on the LGIM deal at Deansgate Square. He estimates that up to £500M further deals are now in live discussions, with perhaps half a dozen completing early this year.

“Investors are becoming more particular," Sinclair said. "They want schemes with a point of difference, and although there isn’t unlimited capital chasing this sector, we’re going to see starts on site up because there are more funding deals around. We’ll see an uptick in starts.” 

Developers can smell the money now returning to Manchester BTR, and it certainly interests them.

“Interest in Manchester BTR never went away, but in the wake of the 2017-18 starts on site, landlords’ aspirations for land value grew rapidly, and the last 12 months have been about rebalancing the market to include lower landowner expectations,” Glenbrook Residential Director Shannon Conway said.

“As their aspirations have cooled, so pricing has become more realistic, and the market has come back for investors and developers.”

Both developers and investors now have the confidence generated by the evident success of Manchester’s last wave of BTR schemes. LGIM’s West Tower is now more than 70% let, and others have moved extremely fast. Stories abound of 100-plus unit schemes letting in five or six weeks.

Burlington House, the first Manchester private-rented development to be undertaken by Leeds-based property investor Town Centre Securities is among those celebrating. All 91 luxury waterfront apartments in the Piccadilly Basin development in Manchester City Centre let within just three months of launch in May 2019 and the firm is now enthusiastically reviewing options for more of the same in the Manchester market.

JLL Lead Director for Manchester and UK Residential Stephen Hogg agreed the numbers are very encouraging.

“A lot of developers and investors were waiting to see how West Tower and others like it performed, and now we know they have performed exceptionally well," Hogg said. "Projected rents are being exceeded with rents up 6%, above the 3% benchmark. And vacancy rates are staying down at a nice comfortable 5%, ideal for some churn.” 

Coliving: Needs Regulation

The arrival of large-scale co-living developments in Manchester poses a more complicated problem for developers.

Whilst there is clearly unmet demand for one-bed apartments, the planners have yet to be convinced. Manchester City Council has been mulling a new policy directive that would see co-living treated with a high degree of caution on the basis that it contributes little to solve housing need or affordability problems.

To be fair to the city council, they step into a live debate in the Manchester property sector about the strengths and weaknesses of co-living.

CBRE’s Sinclair makes a powerful case for the city to unblock co-living development, but with care and not haste. “The council argues co-living cannot help affordability, but if you look at the average cost of a city centre property — rather than at the average Manchester price across the entire city — you can see co-living can make an affordable alternative,” he said.

“We know there will be demand, because the big investors will tell you BTR demand is for one-bed apartments, and that is not being delivered. But the council is rightly interested in policing the quality of developments, the level of specification, the quality of the offer. They want to make sure graduates are happy to live there. Local council work on those design principles is welcome, they absolutely have to be there.” 

Glenbrook’s Conway agreed. “The council has some understandable reservations about co-living," he said. "It’s an exciting sector, it could be fascinating, and we should welcome it, but the key questions are about management and quality. Some providers could manage co-living well, others will not and tenants are open to abuse from speculators who will not manage their blocks properly. So we need some controls, regulation or licensing, to make it work because this is basically just a new version of houses-in-multiple-occupation. The council are being careful, and they are right to be.”

Manchester’s city living sector has been one of the strongest performers in any UK region in the last five years. This year, with investors back on patrol and new concepts under examination, that market could take the next step forward.