Peak BTR? The 35-Storey Manchester Tower Nobody Wants (Yet)

Whisper it, if you dare: after three years of storming performance, has the Manchester build-to-rent and city living scene reached a peak?

The fortunes of one 35-storey city tower suggest that investors are taking a cooler view. If they are, are they right to do so?

Ahead of the Bisnow Manchester Build To Rent event on 9 May, we find out.

There comes a time in every development cycle when the mood begins to change. The difficulty is recognising that moment when you reach it, because so many other things such as bad luck, bad timing, international capital movements, national politics, exchange rates and money markets could so plausibly be to blame. 

So when a 35-storey residential tower scheme, planned for a market with an apparently limitless appetite for residential towers, stalls repeatedly, what conclusions do you draw? Fumbled development, bad karma, a tricky site, or could it be that the limitless demand has suddenly and decisively reached its limit?

Take the example of the Inhabit development proposed for 10-12 Whitworth St. during the hottest few years the Manchester city living scene has yet experienced. The scheme began, back in 2009, as a potential mixed-use/hotel development pioneered by Ask. After various changes of plan and ownership it won consent for the current 327-unit scheme in April 2016. A main contractor was selected rapidly, reportedly Kier, but by late 2017 the scheme was on hold after agreement with the contractor could not be reached.

By early 2018 the problem now was funding. "Unfortunately funding could not be obtained and the site was subsequently put out to the market for sale. The sale of the site was unsuccessful and the shareholders took the decision to enter into an agreement with a delivery partner and progress the project," paperwork submitted to Manchester city planners said. A sale of interests in the £1B Inhabit portfolio to U.S. build-to-rent giant Greystar had collapsed, as Estates Gazette reported.

Today, in May 2019, the plan is to find a joint venture partner with strong Manchester connections by November 2019. A main contractor will be appointed with the aim of work on-site starting by October 2020.

Planning permission was due to expire on 11 April but has now been extended. According to a timetable submitted to the city council, Inhabit is currently reviewing joint venture partners with a view to a decision in late May.

Bisnow's emails to Inhabit have bounced back and a recorded announcement to the contact number on its website said calls to this number are suspended. The PR firm listed as their representative said they no longer represent them, and do not have contact details for a replacement.

The latest submission to Manchester City Council was submitted by Deloitte Real Estate on behalf of the original applicant, Brigantes Limited.

BTR completion rates soaring

Is the up-down history of the Inhabit tower a sign of a market with issues? The consensus seems to be that the red-hot phase of Manchester BTR has cooled to something more orange (and sustainable).

“The BTR market in central Manchester is undergoing an inevitable calming of values as more schemes are delivered," Colliers International Director Mike Brassington said.

"Many of these latest developments are of a higher quality than their predecessors, offering features such as gyms, lounges, outside space and home working space as standard to meet the increasing demands of residents. The delivery of higher quality stock will reduce rental levels at older schemes, thereby creating a more diverse rental sector, and making more properties more affordable to a wider number of people."

Brassington remains upbeat, pointing to Manchester's high graduate retention rate, which continues to underpin growth. But there are signs that for some in the Manchester residential sector the city's boom is itself causing a problem. Land prices are up, construction costs are up, and potential tenants have a wider choice than ever. Together that spells trouble.

“Undoubtedly some schemes are better than others, but Manchester has high land values and high construction costs, which puts pressure on profitability and that in turn means pushing rents up," JMW Solicitors Head of Real Estate Commercial Ruth McCarthy said. "There’s still lots of cranes on the skyline, and supply won’t peak until 2021, there is still demand. But survival for developers will be about who gets the rentals attractive for investors and also provides the facilities tenants are willing to pay for, and the big factor there is that today occupiers have choices.

“Developers are scrutinising costs because the margins are nothing like what they were back in the day. A few years ago they were looking at roughly a third land, a third construction and a third for them. Today they would be lucky, very lucky, to hit 20% margins, and so people are looking at build costs.”

Margins shrinking but not vanishing

A more competitive market is a market with narrower margins, Glenbrook Director Ian Sherry concedes. But it is certainly not a market that has peaked.

Glenbrook has reached practical completion at The Trilogy, a 232 apartment build-to-rent scheme on Ellesmere Street in Castlefield. The 220K SF scheme was forward funded by The Moorfield Group in a £40M deal, and incorporates a series of features specifically for the mid-market BTR tenant.

“I don’t think the Inhabit scheme is a good barometer," Sherry said. "It missed the BTR market at its height, and has remained empty, it's right next to a railway line with buildability issues. A more conservative scheme could be delivered there and probably will be. But that aside, nothing in the BTR market has really changed, as the Q1 BTR figures show.”

Sherry said well-located and well-priced schemes will still attract investors and tenants, but that finding those well-located sites requires more ingenuity.

“It’s a challenge but there are still plenty of opportunities as the tram lines extended, and in surrounding boroughs. I don’t think everyone’s margins have been affected in the same way, although for everyone land values have gone up and so have construction costs. I think it depends how cautious a developer is, and some prefer not to put the viability under so much pressure by bidding high on land costs,” Sherry said.

“There’s also pressure on margins from the fact that where there were two developers for every site, there are now 10, as well as build-for-sale developers who sold overseas now looking to the UK institutional market to build BTR. But we have another 600 Manchester BTR units starting in the next 12 months, so it's not a sector we’re worried about.”

Inhabit’s Whitworth Street scheme is well-located, as several other developments in the immediate vicinity attest. It has planning permission, and if the timetable is to be believed, it is close to finding a joint venture partner. No doubt it will happen in some form. But in the next two years Manchester may find more schemes moving more slowly, as developers face up to a squeeze from contractors at one end, and potential rent-paying tenants at the other.

To join the conversation at the Bisnow Manchester Build to Rent event on 9 May register here.