Manchester has quietly become one of the UK’s success stories and with the central government looking to further empower cities to help drive growth and productivity gains, local authorities and developers are looking to local and international investors to help fund this regeneration.
But the types of projects they are backing are changing. Higher interest rates and construction inflation mean they can no longer rely on yields, instead they need steady income as well as operational levers to ensure downside protection.
At UKREiiF, the sprawling real estate and infrastructure festival in Leeds, cities, regions and combined authorities are at the fore, demonstrating the new devolved spending powers that have been handed to local leaders. Mayors like Andy Burnham, who may soon be swapping Manchester for Number 10, have harnessed these extra capabilities to actually make a difference and have often used the event to make the case for even more investment both from central government and the private sector.
“No government in living memory has done more to tackle the country’s housing and infrastructure deficit,” said Matthew Pennycook, minister of state for housing and planning at the event
Why operational real estate matters more
A couple of trends have helped push hotels and other forms of operational real estate to the fore in both the UK and other developed markets.
The first is the end of the ZIRP environment post COVID. Between 2008 and 2022 investors, especially at the core and core plus end of the market could buy an asset, not do anything and let yield compression do the heavy lifting and after a couple of years, hey presto, you could sell for a decent profit. That era is over and we’re not going back.
Secondly, cities are working out what to do with assets that no longer fit their original purpose, driving place-based regeneration that requires a mix of housing as well as forms of operational real estate.
Together these trends are driving investors into more operational assets
“If you aren’t getting return from yield movement, the focus has got to be on income,” said Rebecca Shafran, research director at BNP Paribas Real Estate
One good recent example of a hotel as part of the wider regeneration story is the £430 million Heart of the City regeneration scheme in Sheffield, which included a new Radisson Blu hotel.
Speaking back in 2023, Sean McClean, director of regeneration and development at Sheffield City Council, said that taking the lead in the regeneration of the city centre meant taking more control.
“The hotel is part of what we want from the centre of the city, creating a different city that people want to work in, live in and come and stay in,” he said. “As a council, setting our standards in what we expect in terms of sustainability but also a real living wage, means that we can have an impact for the greater good of the city.”
Capital is available but selective
Many investors from both inside the UK and outside are getting comfortable with the new normal but given the risk of getting it wrong, are being much more selective in the projects they are backing. There is also a feeling that there still is a slight mismatch between what local and national governments are looking for and where private investors want to place their cash.
“Given where the risk-free rate is, investors are looking to come into real estate because it's a very robust and stable long-term investment, but they're willing to take less risk on the way,” said Tom Goodall, CEO of Related Argent.