Cushman and & Wakefield Manchester Office 2021 Predictions

"After one of the most uncertain and difficult years for some sectors of our working careers, Cushman & Wakefield’s Manchester office wanted to share our thoughts with you on the prospects for 2021".

Caroline Baker- Head of Manchester Office

Office Agency:

The office market has been relatively subdued in 2020, particularly when it comes to large transactions, but mid-size office requirements have performed strongly, as businesses take a view on their occupational needs and the role of good quality office accommodation. 

Office take-up for 2020 totalled just over 800,000 sq ft, the first time total annual transactions in the city centre have dropped below 1 million sq ft since 2013. The yearly total for 2020 is significantly lower than that recorded in 2019 when almost 1.45 million sq ft of deals were signed. By far the biggest transaction record in 2020 was the pre-letting of 175,000 sq ft to BT at 4 New Bailey.  

 Whilst 2020 was a challenging year for the property industry, and the office sector in particular, we are already seeing signs of recovery. BT’s commitment to 4 New Bailey affirmed that major occupiers still have an appetite for large scale office developments and remain attracted by high-quality developments, access to a skilled workforce and the international connectivity that Manchester offers.  

We believe firms that paused searches for office space, will begin to restart the process this year with an increased focus on flexible working and the wellbeing of staff. We have already started to see several occupiers reactivate their requirements. We expect this to continue with the addition of occupiers in the e-commerce, fintech and cyber sectors being attracted by Manchester’s digital and tech talent. 

Looking ahead, we predict that ‘working from home fatigue’ and confidence around the vaccine roll-out will improve demand during 2021. While offices may be looked at differently going forward, the role of the office as a collaboration ‘nerve centre’ remains important for many occupiers. The office provides an environment of fast-paced communication which simply can’t be replicated at home. 

Sustainable development is also becoming increasingly important, developers are reacting to this with the next phase of office developments in Manchester. Corporate occupiers are leading the way in this arena by demanding their real estate delivers tangible sustainability outputs, as they strive to be reduce their carbon footprint. We expect we will see Manchester’s first Net Zero Carbon office building by 2022. 

With the vaccine roll out providing light at the end of the tunnel, we are optimistic that take-up will recover in 2021. 2020 taught us that making predictions is impossible, however as confidence returns, and the new reality emerges, there are some very clear dynamics that Manchester has the resilience and flexibility to respond and thrive in the new normal. 

Rob Yates - Partner and Head of North-West Office Agency 

Residential:

2020 was a remarkable year for the UK housing market which defied all initial expectations of a post-pandemic ‘crash’. Although sales activity and prices dropped in the immediate aftermath of the pandemic, annual house price growth reached 7.3% at the end of 2020 according to Nationwide, representing a six-year high and 5.3% above the level prevailing in March when the pandemic struck.  

The strong bounce back in activity, despite the wider economic damage, reflects a number of well-documented factors, including the release of pent-up demand, changing lifestyle practices causing buyers to reassess their housing needs and policy measures to support the market, notably the stamp duty land tax holiday.   

The headline indicators do however mask the increasingly polarised market which developed over 2020, with the recovery largely being driven by wealthier demographics and home-movers rather than first-time buyers and those on lower incomes.

As we move into 2021, the outlook for the market is plagued with uncertainty. It is possible to construct plausible cases for both continued robust performance and a market downturn. On one hand, downside risks include rising unemployment, the withdrawal of government support and the reformed (and more restrictive) help to buy scheme commencing in April 2021. On the other, increased household savings, changing lifestyle practices and the ‘search for space’, and record low interest rates may sustain demand and activity for longer.  

Predictions for 2021 accordingly range from price falls of c. 14% (Centre for Economics and Business Research) through to price growth of c. 4% (Rightmove), with the majority sitting in the ‘flat’ or ‘modest falls’ camps. 

What can be stated with certainty (!) is that the outlook for the market will continue to evolve as more clarity emerges on key influencing factors, including the effectiveness of the vaccine rollout, further government policy responses (particularly an extension to the stamp duty holiday), the strength and geography of the economic recovery, and consumer / business confidence.  

The level of activity in 2020 has supported new build sales rates across the North West, with many developers reporting high reservation numbers over the second half of the year. This has driven continued strong demand for land in the North West market, where good quality sites remain scarce particularly in suburban locations. Land values have remained very robust as a consequence and we expect this trend to continue over 2021 for well-located sites.  

That said, as well as the uncertainty associated with the pandemic, housebuilders are grappling with several other challenges, not least the climate change agenda. Enhanced energy efficiency requirements are increasing costs and putting pressure on margins. This will necessitate disciplined cost management to maintain profit levels whilst also being able to support competitive land bids.   

There are a number of key themes to watch in 2021, including decarbonisation noted above, as well as building safety and the ongoing cladding crisis, leasehold and planning reforms, the post-Brexit market and the Renters’ Reform Bill. All in all, we look set for another intriguing year! 

Hannah Gradwell - Senior Surveyor  

Public Sector Advisory:

Nowhere is the impact of the pandemic being felt more acutely than across the public sector. Five prevalent and inter-linked themes as we move into 2021 are: 

1. The economic fallout could be long lasting. Tax revenues are falling, and government spending and consequently debt levels are rising leading to record deficit levels. There will be much interest in the March Budget, and what this means for Central Government spending priorities and our communities. 
2.  Local Authority finances, already stressed, are now in a perilous state. Further, deeper service cuts are surely unavoidable as well as wholesale reorganisation, which will directly impact Councils’ future property needs. More for less returns. 
3.  Further debate about the Government’s proposed “levelling up” of prosperity across the UK through infrastructure investment. What does this really mean, how is it measured, how will it be funded over the long term? The first round of competition for funding to support local projects will open in the coming weeks.  
4.  “Health is made at home, hospitals are for repairs” is the title of former NHS CEO Lord Crisp’s new book. There will be continuing emphasis on developing more localised, place-based approaches to improving population health and wellbeing, with care closer to home and more preventative rather than reactive approaches. This requires further integration of health and social care systems with wider public services, with the right facilities needed to enable this.  
5.  Like all sectors the environmental agenda has become high importance. The UK committed in December to reducing emissions by the fastest rate of any major economy and is on the path to net zero by 2050. Greater Manchester in response has pledged to become carbon neutral by 2038 across all 10 boroughs. The public sector has to lead this change. 

Neal Riley - Partner 

Student Accommodation Investment:

Despite the challenges of 2020, the student accommodation sector in the North West has maintained yields, as investors continue to recognise the strength of the respective universities. Twelve of the top 100 universities for 2021 are in the North West, comprising a total full-time student population of over 195,500, which makes up 10.5% of the UK student body. Coupled with ￡75m of operational assets available on the market, there is a positive outlook for 2021 and beyond.  

We expect that 2021 will be one of the most competitive years on record as premium sites and existing buildings suitable for conversions are becoming harder to unlock. There are examples of multiple schemes which have not completed on time for the targeted academic year, which significantly impacts the value of these assets in the short-term. Construction costs are rising as accommodation quality becomes more important for students, who are now aspiring to a hotel-like experience during their studies. This has already led to some developers exploring creative and innovative ways to lower costs, and at the same time, reduce the overall construction period. 

Cushman & Wakefield is advising on multiple projects in the North West which we believe will result in quality and affordable accommodation for students attending some of the best institutions in the country. 

Olan Coyle - Senior Surveyor 

Healthcare and Alternative Assets:

The Government’s decision to prioritise care home residents and their employees in the vaccination rollout has been well received by the market. This should bring back some normality to operations and go some way to restoring market confidence.  I expect the stalled transactions of 2020 will resume and developments which have been held up by the effects of Covid-19 will be brought forward.   

Looking ahead, the effects of Covid-19 will be felt far greater at the lower end of the market, where revenue is limited and the assets are older. A significant proportion of the UK’s care home inventory is older stock and no longer fit for purpose. Whilst the spotlight has been on these older assets for a while, the impacts of Covid-19 are expected to sharpen that focus and in some cases, Covid-19 will be the catalyst behind their exit from the market.  As the world creeps back to some degree of normality, I expect that investors, financers and operators alike, will take stock of their positions with older assets and we expect to see many of them come to market for redevelopment and repurposing.    

 The increasing need for care fuelled by ageing population growth, together with the pressing need to replace older stock will further drive development. The search for suitable care home development sites has been on the industry’s agenda for some time now, although I expect this to increase during 2021.  As investors regain confidence in the market, I expect to see competitive bidding for the best opportunities in the sale and leaseback market, and we expect to see more forward funding deals as investors look into the longer term for the best opportunities. 

Gary Yeardley - Associate 

Planning:

2020 brought in significant planning legislative updates, the impact of which will continue to be felt and understood throughout 2021. The shake-up of the planning Use Classes Order introduced Class E, and the Government is currently consulting on changes to Permitted Development Rights (PDR) which would enable the change of use from Class E to C3 residential without needing planning permission (subject to consideration of technical matters). The new PDR are expected to be in place by summer 2021, the impact of this on northern towns and city centres currently struggling from low footfall will start to be understood in the second half of the year. 

At the end of 2020, the Government published the new standard method for assessing housing need. Rather than ‘levelling up’ the North and South, the formula instead increases the requirement in the South East with the majority of areas in the North West now facing a lower requirement than their adopted Local Plan position. It does include a somewhat arbitrary 35% uplift for the 20 largest cities, which impacts Manchester and Liverpool in the North West (but only those Councils and not their neighbours). Expect to see emerging Local Plans reduce the housing requirement and drop controversial site allocations, whilst planning applications hoping to use housing need as an argument may now struggle. Stockport however is facing a 36% uplift from the requirement it was attributed in the GMSF, so perhaps they will regret being so hasty in striking out alone. 

A response from the Government is also expected this year on the Planning White Paper following the consultation held in 2020. This will determine the extent of the proposed reforms and the timing of their introduction.  

More insight on the implications of the Government’s proposed reforms for real estate can be found here:https://www.dhirubhai.net/pulse/pitfalls-opportunities-around-planning-reform-andrew-teage/?trackingId=emQOrT2ZYSFUc%2BhzMh8xWg%3D%3D  

Claire Pegg – Associate 

Industrial:

2020 was a record-breaking year for the Industrial & Logistics market. Take-up across the UK reached over 50 million sq ft, which eclipsed the previous records by 10 million sq ft, set in both 2008 & 2018. North West take-up grew 32% from 2019 to achieve 4.7 million sq ft. This success was largely down to the increasing dominance of E-commerce businesses such as Amazon which accounted for 31% of take-up in 2020. Subsequently, parcel delivery services such as Hermes also had a strong year, accounting for an additional 9% of take-up, which again highlights the success of online delivery businesses throughout the pandemic. 

It is anticipated that in 2021 there will continue to be a shift in consumer spending from traditional retail to online shopping. This trend will further add to demand for both large distribution centres and last mile delivery depots which are integral to efficient E-commerce supply chains.  

Behind the scenes, a new speculative cycle appears to be slowly building as investors/developers compete to secure new sites, with several schemes to be launched later this year. These include Port Cheshire, Symmetry Park Merseyside, Grand Central Trafford Park and Alpha 176 in Warrington. 

However, the sector is currently experiencing a notable lack of supply which will not ease moving into the early stages of 2021. Supply fell by 40% in the North West to 7.4 million sq ft, well below the long-term average of 9.3 million. This undersupply will likely mean rental and capital values hold firm early in the year but as we move into Q3/Q4, prices may begin to rise as supply tightens further. We predict that new headline rents will be achieved in the North West by the end of the year. 

Laurence Davies - Surveyor 

Development Consultancy:

2020 was an unprecedented year given the Covid-19 pandemic, the impact of which will reverberate across every aspect of the market and our lives for some years to come. However, we are already seeing glimmers of opportunity for 2021. The Brexit Deal achieved in December and which came into effect on 1st January ends years of uncertainty and offers some comfort around our future relationship with Europe and the rest of the world set within the context of global economic trends and their potential impact on the property market. New emerging Government initiatives such as Freeports will come into fruition in 2021 and help support international trade, economic development and job creation as Britain continues its transition out of Europe. 

Struggling town centres were a funding priority in 2020 through the Future High Street Fund and Town Deal. Whilst competition for high street support will remain fierce in 2021, the pandemic has driven a shift in focus to better respond to the challenges and embrace the opportunities presented by their changing roles. The accelerated growth of online retailing underlies the need for continued diversification. Housing will play a key part in this with increased town centre living helping to increase footfall and spend whilst also responding to the ongoing challenges associated with the housing crisis, an aging population and reducing pressure on our Green Belt. New ways of working and a renewed focus on health and sustainability will present further opportunities for walking, cycling and supporting smaller more local centres. The Government’s Levelling Up agenda will finally start to recognise and address the greater challenges facing northern towns and cities as they seek to deliver viable and sustainable change. 

Heather Standidge - Associate  

Investment Market:

Overall UK property investment transaction volumes in 2020 at ￡43 billion dropped significantly, 25% down by comparison to 2019. In the last quarter of 2020 started to see a strong recovery in trading. In pricing terms we noticed that that was a “flight to prime “with valuations for the longest term income improving while values for secondary and tertiary assets started to slide. As a result the spread of yield between prime and secondary assets widened considerably and It's starting to resemble historic highs. 

The performance of each sector (and even sub sectors) differed significantly. The biggest winner was the Logistics sector mostly at the expense of the High Street retail sector, reflecting the increase of on line shopping. 

Offices: 

• Transaction volumes in the regions were hit hard as a result of the lockdowns although investments with long income remained popular with investors. We have seen some investment stock offered to market and failing to sell indicating that it was mispriced and failed to reflect a shift in values of between 10 and 15% for core plus assets. 
• It is anticipated that with a particular focus on ESG (Environmental, social and corporate governance) prime offices will prove more resilient as companies try and attract their employees back in to the office. Also Manchester will outperform most other regional centres, including London, this year in rental growth terms  

 Logistics: 

• This sector accounted for over ￡4 billion worth of transactions in Q4 2020 and we estimate that there is as much as ￡20 billion worth of capital still chasing this sector  
• It is predicted that logistics will have another strong year in 2021 in pricing terms but activity might be constrained due to the lack of stock. Prices are at historic highs reflecting phenomenal rental growth in the sector in recent years. After further price increases last year can this go any further?? We know that the institutions were net sellers in 2020 but some may come back this year having adjusted pricing models. Supply and demand characteristics in the North West mean that there could be even more pressure on rents in the region in the next year by comparison to others. 

 Retail/Leisure: 

• This sector (in particular the High Street ) has been on the back foot for several years now, but 2020 was a particularly torrid year as the lockdowns accelerated the move to multi-channel sales model for many retailers. There were only ￡340 million pounds of shopping centre deals last year but the out of town/ retail park sector proved a little more resilient, in particular, DIY and food. 
• It is likely that the high Street will continue to have a tough year in 2021 and landlords will have to work hard in order to deal with significant voids left by closure of significant brands.  
• Local authorities also have a role to play in reshaping their town centres in order to attract customers back. In some cases values may drop to the extent that redevelopment to alternative uses including residential becomes more viable. 

 Residential:  

• 2020 saw over ￡4 billion of investment transactions which represents a 40% year on year increase . The Private Rented Sector market continues to mature and attract increasing levels of institutional capital. 
• We are going to see increasing levels of interest in the Private Rented Sector and in particular a focus not just on apartments but on family housing that provide longer term more stable income. 2021 could see a further increase of trading volumes by as much as 20%.  

 Specialist Sectors (including Student/Healthcare/Life Sciences): 

• This “catch all” name for all other sectors not covered under the headings above reflects a now historic reflection on the overall importance of these markets in relative terms. We must however recognise that these specialist sectors represent 26% of total investment transaction volumes in 2020, higher than any other sector in isolation. As such we must realise that these sectors now represent a very significant part of the investment landscape that is here to stay.  

While the UK economy will have to contend with several bumps in the road in 2021 as companies emerge from lockdown and government reliefs are withdrawn there are several reasons to be optimistic. 

We are now waiting for the benefit of the vaccine roll out and the subsequent increase in economic activity but the Brexit deal has removed some uncertainty from markets and after stagnating in recent years the UK valuations look cheap in global terms. Lockdown has also meant an increase in private sector saving, there will be further government stimulus and there is no shortage of investment capital chasing opportunities at the right price so overall we expect a strong bounce in trading levels this year. 

Bruce Poizer- Partner