The Subplot | Bruntwood gives birth to quantum real estate

Welcome to The Subplot, your regular slice of commentary on the business and property market from across the North of England and North Wales.

THIS WEEK

• Bruntwood is gone, and yet it’s still there. Why the most significant Northern corporate property deal of the decade is going to change your world
• Elevator pitch: your weekly rundown of who and what is going up, and who is heading the other way

­PROJECT QUANTUM

Northern property’s ‘Sliding Doors’ moment

Bruntwood’s decision to fold much of its portfolio into a joint venture means the end of one vision of Northern real estate. From now on, it’s all about London.

Project Quantum they called it: the proposal to re-form Bruntwood SciTech as a potentially £5bn three-way partnership between Manchester-based office property giant Bruntwood, Legal & General, and the Greater Manchester Pension Fund. The result is that Bruntwood as we have known it is no more, and yet it still exists; is here, and yet not here. Which is how quantum mechanics works. Somebody, it seems, was having a laugh. But it may not be much of a laugh for Northern real estate, which as a result is about to have its own unsettling quantum moment. In short, the Northern property world as you knew it has gone. Or is it still here?

Blink and you’ll miss it

What we know is this. The bulk of Bruntwood’s city centre assets in Manchester, Leeds, Liverpool, and Birmingham go to the new SciTech business. Some have debt attached. Note two loan charges were registered earlier this month for £121m and £155m respectively.

At the same time, a £500m equity fund raising allows GMPF to chip in £150m and in the process join a JV with Bruntwood and Legal & General. The now-shared assets – which include the monster development opportunity at ID Manchester and an array of much-fancied real estate – will be managed by the existing 50:50 Bruntwood/L&G vehicle. Bruntwood is not the majority controlling party in the owning partnership. Read Dan Whelan’s excellent post-deal interview for more.

We also know this

Speaking to Whelan, Bruntwood chief executive Chris Oglesby (pictured) said the decision to put assets into the pot and to gut Bruntwood Works “comes as a response to the changing needs of innovation-led businesses post-pandemic” – which is one way of putting it. Another way is to say that the kind of regional office market Bruntwood has been bestriding for decades is, to be delicate about it, up effluent brook without a means of propulsion. A data release this week, and the prospect of another next month, make the point beautifully.

Rock meets…

Tuesday saw the publication of Bayes Business School’s latest half-year analysis. Year-on-year the volume of new loans was down 22%, and is now just a fifth of the £2bn lent in the first half of the year. The default rate was up – from 3% to 4% which is more significant than it looks – and requirements on interest coverage mean many borrowers just don’t have the room for more debt. Around £178bn of property debt needs to be refinanced in the next three years, which is going to be extremely painful. Liquidity is lower for offices than for beds and sheds, and loans over £80m will probably need syndication.

… hard place

In about four weeks Schroder Real Estate Investment Trust will publish its results to October. Schroder invested heavily in Northern offices at the time Bruntwood was doing the same, buying City Tower in 2014 for £132m, so makes an interesting comparator. The Schroder portfolio’s net asset value was reported to be £301m in June, down from £366m in September 2022. That’s a lot of movement. Nevertheless, Schroders’ portfolio has outperformed its peers with the valuation buoyed by City Tower holding its value, a strong weighting to industrials, and a fair chunk of real estate in the South of England, the last two of which Bruntwood doesn’t have.

Southerners

Bruntwood’s assets are not run-of-the-mill regional offices. It’s good, well-let, well-lit, well-managed stuff. Its lines of credit are good. But the 1990s and Noughties refurb wave Bruntwood surfed has now petered out in the shingle, and with it the idea that it is possible to sustain a large-scale, Northern-owned and -based city centre office provider.

Not long ago Bruntwood buildings reliably scooped between 30%-50% of Manchester city centre office lettings. Locally managed, and locally connected, that was a powerful presence and one of great benefit to the city council. The same vibe helped in Liverpool and Leeds.

But the future now belongs to the London-based corporate landlords, whose interest in the city has been growing exponentially for a decade or more. Their relationship with the North is via a spreadsheet, not via you knowing their dad. Had it not been for the Covid pandemic it might have been different, so this is a proper sliding doors moment.

And yet there it is

In a sense, it is amazing a regional landlord like Bruntwood survived in an increasingly internationalised Northern property market for as long as it did. The proceeds of selling to the new JV will be used to pay-down debt. Bruntwood will retain an estimated £360m portfolio that includes roughly £260m of suburban office sites and £100m of town centre regeneration schemes in Trafford and Bury.

Is the cat dead?

This is where the quantum element comes in. Rump Bruntwood is far from valueless. Some observers feared it would be a passive vehicle, there to wind-up regeneration schemes and keep office assets fresh and income-producing till Chris Oglesby retired. But this isn’t how it will go.

In response to enquiries from Subplot, a spokesperson said: “Bruntwood won’t stand still and is absolutely looking to grow its portfolio – this new structure enables the firm to do so, giving both firms an opportunity to ignite their refined propositions and maximise the opportunities in each. Bruntwood will be looking to redevelop even more assets within its suburban office portfolio, acquire more suburban workspaces, and expand the JV town centre partnerships to other towns.” In other words, the show goes on.

So there we have it. Bruntwood is no more, and yet Bruntwood is still here. The days of the quantum property market have truly arrived. Or not.­

ELEVATOR PITCH

Going up, or going down? This week’s movers

Sheds, never exactly out of favour, have overcome a chilly period. And Leeds’ office market awaits some numbers. Doors closing, going up.

Shed love

Some 640,000 sq ft of prime industrial in five units has reached practical completion at Integra 61, the £400m Durham mixed-use development being developed by Citrus Group at Junction 61 of the A1(M). It’s one of the largest schemes in the region and comes as investors re-ignite the hot little flame that burns under the big shed scene.

Permanently gung-ho Tritax Symmetry has bought the 221-acre Parkside East site in St Helens that was being promoted by ISec. A 2.5m sq ft freight interchange is planned, and under Andrew Dickman’s leadership this slow-moving scheme is more likely to happen than not.

For most of the past 12 months there’s been modest investor fretfulness about big sheds in the North, thanks to Amazon scaling down, retailers going bust, and supply chain costs meaning rental negotiations became more of a conversation, less of a done deal. Other parts of England looked more attractive thanks to the usual supply-demand issues. Maybe that hiatus is now over?

Waiting for the tide to turn

Unless Subplot missed it – in which case, sorry – we’re still waiting for the Q3 Leeds office take-up figures. Given how well the first half went – 412,756 sq ft, up 53% compared to the same period in 2022 – the numbers will be interesting. In a few years, the supply and demand balance could look very different.

Developers are already planning for that day. This week BAM Properties submitted its proposals for 12 storeys, meaning around 150,000 sq ft of offices, at Latitude’s final plot off Leeds’ Whitehall Road. A start on site is pencilled in for 2025 – a great choice, far enough away for things to have changed for the better, near enough not to look like it’s a feint – and tenants could be moving in during 2026.

Fingers crossed the numbers don’t encourage them to push it back.