Even before the idea of a Northern Powerhouse crossed the Chancellor’s desk, Greater Manchester had established itself as Britain’s second city in terms of regeneration, growth and governance.

Employment growth in Manchester has been faster than in any large UK city, with job creation being relatively broad-based across sectors. More professional services jobs have been created in the North West than Greater London over the last 12 months, many of them in Greater Manchester. Indeed, 57,000 jobs have been created in central Manchester since 2011 – more than double the rate of growth in either the North West or the UK as a whole.

This strong growth is down to a number of structural factors, including the city’s well established strength in financial services, business services and education. The city has also benefited from the return of ‘northshoring’, where companies are moving or expanding out of London and the South East to take advantage of lower property and staff costs. These factors are underpinned by a rapidly growing population, especially of graduates and young professionals.

With office rents in London now at record high levels, the ‘northshoring’ story is not going to go away. We estimate that the cost saving per employee for a company considering a move or expansion from central London to Manchester could be as high as £10,000 per person per annum in property costs, and £10,000 per person per annum in staff costs.

As a result, we believe Manchester’s underlying strengths will play a greater part in the outlook for the North West region than policy initiatives. It is likely that a small number of Local Authority areas will account for a large share of the region’s overall growth. The majority of these will be in Greater Manchester. We remain slightly sceptical about the impact of the ‘Northern Powerhouse’ initiative for the whole of the North East and North West.

^{Source: Oxford Economics}

Growing demand

Strong growth is not without its challenges. We estimate that Manchester and Salford will need to accommodate 36,000 more office workers over the next decade. At a relatively conservative occupational density of 1:8, this implies a need for a further three million square feet of office space over the next decade, or nearly four million square feet at 1:10 ratio.

The housing market faces similar challenges, with Oxford Economics projecting that the resident population of Manchester and Salford will rise by 65,500 people over the next decade. There has been an undersupply of new homes in the city in the recent past with just 4,500 net additional dwellings per year in Greater Manchester between 2010 and 2015. This is less than half the 9,654 new homes that should be provided every year according to the districts that make up Greater Manchester.

Gap in supply

However, the combination of developer and funder caution is still unlikely to deliver enough new real estate over the next decade to satisfy the demands of this growing city.

We estimate that over the next three years one million square feet of new office space will be delivered, with a further half a million square feet of refurbishments of existing building planned. This will leave a significant gap between demand and supply.

Failure to meet demand could not only inhibit the growth prospects of local businesses (as rents inevitably rise), but also could make it harder for the city to attract companies looking for a home in one of Britain’s regional centres.

Housing

The imbalance between supply and demand against a backdrop of an improving economy is underpinning residential values. House prices rose by 3.3% in the year to September 2015, pushing the average cost of a home in Greater Manchester to £111,567. However, Manchester house prices remain below the average for England & Wales which has reached £186,553, according to Land Registry data.

^{Source: DCLG, year to June 2015, district SHMAs}

After a period of little activity throughout the economic downturn, housebuilders are responding by delivering more homes. There are 2,500 homes under construction in central Manchester and Salford at present, according to Glenigan and Land Registry data, and 627 new homes were sold in central Manchester in the year to June 2015.

One key feature of Manchester’s residential property market is the fast expansion of the private rented sector, particularly among students and young professionals. The number of households renting privately in central Manchester and Salford rose by 436% between 2001 and 2011 and now represents 63% of households in the city centre.

The prospects for residential investment have greatly improved over the past 18 to 24 months in Manchester. Most city centre schemes are achieving values in the region of £300/sq ft with realisable rents of about £17/sq ft to £20/sq ft. Gross yields are around 6%.

As a result, Manchester has become a focus for investors including Housing Associations, Private Companies, UK and European Institutions, Private Equity, and the HCA as well as overseas capital from the Middle East, China and US.

However, much more is needed. The rest of this report examines the capacity of Manchester and Salford to deliver new commercial and residential space, and focuses on where the best values might be achieved for developers.

^{↑ Millennium footbridge and The Quays in Salford Quays}