Manchester sounds good to Irish investors Offices

UK Investments: There is always an Irish contingent in the running for major deals in Manchester, a city that is now a star performer in both office and retail sectors. Edel Morgan reports on a city that has been transformed in the past eight years

For many Mancunians, the opening of Harvey Nichols fronting New Cathedral Street was not just a retail coup but the ultimate affirmation their city had finally shed its downtrodden post-industrial image.

One industry source described this reaction to the arrival of the upmarket department store in August as "somewhat ironic".

"It provoked more of a response than some of the magnificent landmark buildings that have gone up since the IRA blast in 1996. Maybe it shows we haven't quite lost our collective inferiority complex but, on the other hand, I suppose it can't be a bad thing that companies like Harvey Nichols are seeing Manchester as a desirable city to locate."

Manchester's residential property market may have lost some of its lure for Irish investors but its commercial property market has boomed since the city centre began to recover from the 1996 explosion at the corner of Corporation Street and St Mary's Gate.

The once dilapidated core has been completely transformed with the help of £583 million of private and lottery funding. Tall glass and steel structures stand side by side with restored old buildings. The Millennium Quarter brings together the historic Cathedral, Chetham's School of Music and Corn Exchange with the new Exchange Square and the futuristic Urbis exhibition centre on Corporation Street.

A geometric footbridge on Corporation Street links the new Marks and Spencer/Selfridges building and the Arndale centre. The Arndale, a yellow-tiled monolith which covered 30 acres and bore the brunt of the 1996 blast, is now owned by Prudential and is undergoing a £150 million redevelopment. The 70-unit Royal Exchange shopping centre has been the subject of a £2.5 million restoration.

The Millennium Quarter is now heaving with shops, bars and restaurants. The Printworks, a former newspaper publishing house which has been converted at a cost of £150 million by Richardson Developments into a bar and restaurant complex and is a favourite haunt of 18 to 25-year-olds. With a floor space of 27,870 sq m (2999,989 sq ft) it also has a 20-screen cinema, the north west's first IMAX screen and a health club.

Also on the former bomb site is a shimmering glass apartment building at Number 1 Deansgate, a development of 88 luxury units by Crosby Homes popular with young professionals. Its sloping roof echoes the shape of the nearby Urbis centre, also designed by local architect Ian Simpson.

The 7,430 sq m Harvey Nichols store stands opposite the world's largest Marks and Spencer's which is a massive 18,500 sq metres over four levels.

There has also been large scale regeneration of the Piccadilly area, a sort of faded mini-me version of its London counterpart. Number 1 Piccadilly Gardens is a new seven-storey office development on the revamped Piccadilly Plaza which is partly let.The ugly 1960s brutalist Jarvis Hotel on the Plaza is also in line for a facelift.

A £55 million revamp of Piccadilly Station by BDP has won nine awards including one from the British Council of Shopping Centres last year. It has seen the once drafty rundown station turned into a shiny ultra-modern 27-unit shopping centre with an upper level food court, and a new concourse.

The new look Manchester has attracted attention from inward investors. A report by Hamilton Osborne King predicts that Manchester will be one of the top European cities in terms of office rental growth this year along with Glasgow, Moscow and Birmingham, Newcastle and Milan.

In the retail market, Manchester is expected to rank as one of the star rental performers along with Dublin, Milan Paris and Lisbon.

A shift away from shipping to service industry has boosted demand for prime city centre office space in Manchester as the focus moves away from the London market.

The £700 million Spinningfields mixed development under construction by Allied London developers on a 22-acre site on the edge of the city centre is likened to Dublin's IFSC centre by James Carroll of Investor First. "It would be like taking the IFSC and sticking it off Grafton Street. But office space at the IFSC is €6,450-€7,212 per sq m (€600-€670 per sq ft) and at Spinningfields its around €4,305 per sq m (€400 per sq ft)." He says that while Manchester is still behind Dublin it should be remembered it has a bigger population and its commercial property is currently two thirds of the price.

Much of the 209,031 sq m (2.25 million sq ft) of office space at Spinningfields is pre-let. Royal Bank of Scotland has reserved two units, one of which is reputed to be four times the size of Old Trafford. Spinningfields also has the Leftbank development of over 300 apartments and 32. 516 sq m (350,000 sq ft) of retail and leisure space.

Investor First has reserved a block of 62 apartments at the nearby Rosetti development for Irish investors which also has a commercial element of nine offices aimed at smaller business being sold of the plans.

"Anything within a 10-minute walk of Spinningfields is a good buy and it's one of Manchester's best kept secrets. They are targeting international players and it hasn't been marketed here much, so people don't realise what is happening there. But like the IFSC, those who get in at the beginning really cannot lose."

Irish investors have contributed to the upward spiral of prices in Manchester. "Irish investors go over to Manchester and outbid the locals. While the locals tend to want a yield of 7 per cent, Irish investors are happy with 6.5 per cent and will often come back and pass it on to another Irish investor at a higher prices so they will only be getting a yield of 5.5 per cent.

"They pay more for secondary and tertiary locations than than English are prepared to pay and may pass it on to a local Irish investor who hasn't much knowledge of the Manchester market and is used to a 5 per cent yield in Dublin."

Carroll says it is often prudent to go for the safe bet. "A block of student apartments may look a bit like an IBIS hotel, not the prettiest but not the ugliest either, but may have a long lease and a yield of 6.5-7.5 per cent guaranteed with an RPI index uplift every year. It is a safe type of investment and a very liquid product. It might make more sense than buying a secondary covenant supermarket in a secondary town in a secondary location with only 15 years left on lease."

The UK has historically been suited to Irish investors because of tax transparency, similar banking, conveyancing and leasing procedures and the advantage of higher yields and greater purchase options. Last year, according to the HOK report, €2 billion of Irish investment capital was invested in the UK, representing about 20 per cent of all foreign investment.

The abolition of stamp duty on commercial property in this year's budget has made it all the more attractive. "Clean and dry" is how Abid Jaffrey of Manchester's Knight Frank describes the preferred business dealings of Irish investors. "There is always an Irish contingent in the running for major deals. Retail and offices are the main focus. The investors we deal with tend to stick to core areas and look for long leases and good tenants producing high yields," he says.

Manchester has more retail opportunities than most other Northern cities, and has a Zone A rent level of £250-£300 per sq m. The move away from London has been prompted by lower yields compared to Manchester and Birmingham, where rental returns were in the region of 6.75 per cent last year and Newcastle, where they were 7 per cent.

Manchester has the added attraction of a large catchment area, Greater Manchester covers 1,286 sqkilometres of land, and is a conurbation made up of the old cities of Manchester and Salford and the metropolitan boroughs of Bolton, Bury, Oldham, Rochdale, Stockport, Tameside, Trafford and Wigan.

According to a report by the Prestige Group, the north west, region has seven million residents and a disposable income of £43 billion. The region has over 157,000 companies and businesses and over 20 million of the UK's population live within a two hour drive of Manchester.

Agents: Knight Frank (0044 161 8387744); Investor First (01 2076474); The Prestige Group (01 6686036)

Modest growth to return to office sector

Modest growth will return to the office sector in 2004, with increased demand in Dublin city centre for second and third generation office space in prime locations, while the retail sector will continue to grow and experience strong demand for outlets in district and neighbourhood shopping centres.

This is the summary of major trends in the commercial market envisaged by Hooke & MacDonald in its annual review and outlook for 2004 which has just been published. The company also anticipates a general improvement in the domestic and international economic environment aiding a recovery in the marketplace.

"The last two years," according to Hooke & MacDonald, "have been difficult for the Irish commercial property market, with many sectors performing below par. However, data for the second half of 2003 confirms that the market is on the road to recovery and the outlook for the next 12-18 months is very positive."

Hooke & MacDonald cites data from the Society of Chartered Surveyors (SCS) and the Investment Property Databank (IPD) Irish Property Index showing the returns on commercial property at 3.6 per cent in the July-September quarter of 2003 up from 2.6 per cent in April-June.

"This was the best performance for the market since the last quarter of 2000," says Enda Moore, associate director of commercial property with Hooke & MacDonald. "The strengthening of the market is underlined by an 8.8 per cent return for the year, which compares with a corresponding figure of 3.2 per cent for the 12 months to September 2002.

"The improvement in the commercial property market is being driven by the retail sector, which witnessed strong growth over the last two to three years. Average rental values for retail property rose by 11 per cent over the last 12 months, while both offices and industrial property registered substantially lower growth."

In the retail sector, Hooke & MacDonald says competition remains very keen in Dublin city centre. Demand for well-located secondary locations in the city centre is also buoyant and there is a "huge amount" of interest in emerging new areas, such as Grand Canal Harbour.

Demand for local convenience shops and services outlets (pharmacists, off-licences and so on) is "particularly buoyant" in developing residential areas with a good catchment population. Growth in convenience food shopping "continues unabated" and many such operators will be active in pursuing new space in 2004.

In the office market, Hooke & MacDonald maintains that there is still demand for second and third generation office space in prime locations while tenant demand is "beginning to increase" as occupiers look to capitalise on potential value in the market.

"Owner occupier demand," says the outlook, "has remained reasonably buoyant during 2003 facilitated by continued low interest rates, with the demand for self-contained own-door premises continuing to grow in 2004. Vacancy rates for offices are high on the outskirts of Dublin, reflecting the oversupply in the market. However, occupational demand will slowly re-emerge in this sector, particularly along Luas lines, and in the most accessible locations. The office sector should experience a return to growth later in 2004, while it will be well into 2005 before the recovery in the industrial sector manages to take hold."

The Government's decentralisation drive should help the office market outside Dublin, according to Hooke & MacDonald, and there are a number of landmark buildings in Dublin that will be vacated in the coming years as a result of decentralisation. "It will be interesting to see the impact that this has on vacancy rates and rental values," notes the outlook.

Regarding stamp duty, Hooke & MacDonald remarks that the increase in this tax early last year had a "notable effect on the sector". Irish investors have become very active in the UK commercial property market where there's a lower rate of stamp duty and lower rates of interest. This proved an attractive option for some.

• Copies of The Hooke & MacDonald Annual Review & Outlook 2004 are available from the company's offices at 118 Lwr Baggot Street, Dublin 2 or can be downloaded from the company's website at www.hookemacdonald.ie . The report is free.

Justin Comiskey