North West Square | The subplot
The temptation to try to replicate the success of entrepreneur-developer Renaker, whose Deansgate Square skyscrapers dominate the Manchester skyline, is strong. Credit: Northwest Square
welcome to The subplotyour regular slice of commentary on the Northwest business and real estate market Northwest Square analysis editor, David Thame.
- The Big Bet: Entrepreneurs are flirting with developers, but can North West companies manage the risk?
- Elevator pitch: your weekly recap of what’s happening and what’s not
THE BIG BET
Can we build it? Yes we can
The entrepreneur-developer is back: today everyone wants to be Renaker. Yet this is a time of dangerous inflation. Will it all end in tears, as usual?
For entrepreneurs, the prospect of becoming a developer has many theoretical advantages. You’re cutting off a risky client relationship, you’re taking two profit slices instead of one, you’re controlling the workflows at a company known for its ups and downs, and since you have all those real estate contacts, why not use them ? Ambitious managers are naturally drawn to this type of diversification. After all, they feel like stars rather than supporting actors in the big show that is real estate development.
The problem is that the outsourcing business is extremely prone to excess and financial collapse. Worse still, the skills of a good entrepreneur are almost the opposite of those of a good promoter. Those who succeed as entrepreneur-developers are either single, time-limited exceptions, like Renaker, or create largely self-sustaining businesses in which the horse drives the cart, not the other way around (big wave of smilies to Morgan Sindall and Muse Developments). History is littered with the corporate corpses of those who tried and failed.
The idea seemed to have lost its appeal until the arrival of skyscraper specialist Renaker. Through incredible amounts of cunning, the courage to ride the build-to-rent wave, and a good clear head, Daren Whitaker has created an entrepreneur-developer to admire. Today, a growing list of aspiring entrepreneurs want a slice of the same pie. Last week, McAleer & Rushe decided to accelerate its transition from entrepreneur to entrepreneur-developer through its MRP development business. It got its start in Manchester buying the 20-36 High Street site from CEG where a 22-storey apartment scheme is planned. Others plan to follow the same path.
McAleer & Rushe suggest it’s no big deal. “This is not an unusual project for our development business, both in terms of program type and value,” a spokesperson said. Subplot. The business has a regional development in Britain with an end value of £1.5 billion and a development value of £300 million, including building to let, student accommodation and office space. Current starts include student accommodation in Warwick and £75million speculative office space in Leeds.
Two problems arise. First of all, is it the right time to become a developer? If a good time was a time when entrepreneurs weren’t under increasing cost pressure, the answer is no. “The additional costs, up 5 to 15% depending on the product, make it difficult to assess our prices. The viability of the projects we are considering has diminished as construction costs rise, particularly in the residential sector,” says Adrian Rooney, operating on the front line as Managing Director of J Greenwood (Builders) in Chadderton. Rising consumer price inflation (see below) will not help either.
No more bad timing
The context is that the lavish support offered during the pandemic has kept many entrepreneurs afloat much longer than expected. The end of the job support/furlough scheme is now causing the number of contractor insolvencies/administrations to rise, a figure that has been steadily rising since September 2021 as the sector returns to failure levels of before the pandemic. The pre-Christmas harvest included Artisan H2 from Manchester, Create Construction and LOR Contracting, JMK Civil Engineering from Cheshire and many more.
Pause and reflect
The second problem is that of wisdom. Liverpool-based Vermont managing director Mark Connor has played on both sides of the entrepreneur-developer barrier, and he’s not sure that’s a good idea for everyone. There are overlaps and contractual know-how can mitigate development risks. But he is not enthusiastic. “Developers and entrepreneurs have completely different skill sets,” he said. Subplot. “I haven’t seen many successful examples of entrepreneurs transitioning to become successful entrepreneurs/developers and vice versa. Unfortunately, many contractors and even developers simply don’t have the infrastructure to handle these risks. »
it will get interesting
“In a buoyant market, I think we will continue to see contractors trying to develop programs and developers frantically trying to facilitate the delivery of their programs by taking on the contractor role and all the associated risks,” Connor says. “The split-sell model has exacerbated this problem with many developers trying to deliver complex projects. I’m not convinced these developers quite appreciate the infrastructure needed to deliver at this scale and it will be interesting to see what will happen in the next few years in terms of this trend.
If Vermont’s Connor thinks the tokens are stacked against entrepreneurs-turned-developers, then bread-and-butter entrepreneurs in the region think that’s madness. Back in Chadderton, Rooney says his £15m family business has no desire to follow other entrepreneurs overboard. “I have already looked at the angle of the development but it seems overcrowded, land prices are too high, too many people are hunting from the UK and overseas, the uncertainties of planning, time and risk – it all adds up to a real distraction,” he says. Rooney suggests taking a second slice of profit is appealing, but only for a few minutes until common sense kicks in.
The appeal of the entrepreneur-developer model is not going away, but the list of successful examples is unlikely to grow.
SUMMARY IN SECONDS
Up or down? This week’s movers
Can you feel the g-force? The North West’s bespoke luxury home development scene can, as it soars right up to the penthouse. Inflation is also skyrocketing.
Fancy a £6million Alderley Edge house measuring 15,000 square feet (that’s ten times the size of a large house, twenty times the size of a small one)? Well, someone does, because it’s now nearing completion, one of the growing bespoke mega-homes in a booming area of the Northwest.
“It’s incredibly stealthy,” says Max Henderson, owner of luxury construction company Noble Projects, of a niche market driven by wealthy buyers diverting vacation spending to their homes. Volumes are up, the size of projects too. “Our customers are more inclined to indulge themselves, and the drift towards wellness encourages them. Every customer wants a swimming pool, a sauna, a very large gym. They want everything they had in the vacation home in Spain.
Big is the word. Gyms aren’t cubbies with an elliptical, but generous spaces of up to 450 square feet (remember, the national standard for a studio is 398 square feet, and planners are looking at studios of just 270 square feet). The master suites measure up to 2,500 square feet, which would be one hell of a house on its own and probably rather bewildering. Henderson has eight live projects in the North West, with four more to come and the prospect of many more. Definitely an area to watch.
Hell in a handcart
How nice would it be to put a big down arrow next to the word “inflation”. Unfortunately, this is not possible. Yesterday’s official figures showed consumer price inflation of 5.4% over the 12 months to December 2021, down from 5.1% in November. This is no surprise to anyone except the Bank of England, which has consistently underestimated the trend, getting more and more massively wrong (as this graph shows). The UK has now reached its highest level in 30 years and inflation will not stop there: 7% seems likely, but who knows?
It’s fine if you have debt (and remember, the government has a lot of debt right now) and the net debtors will smile. The coverage capacity of the property is often greatly overestimated, but it is a coverage of sorts – so there is some comfort. But if you imagine that property can protect against the collapse of the economy, go read the history of the 1970s. This period was also dominated by an energy crisis and a cold war (Partygate erased the ongoing drama in Ukraine), and the shock was all the greater because it ended a long period of prosperity during which many had forgotten what inflation was doing.
Contact David Thame: [email protected] | 01544 262127
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