Planners in central London are facing the resetting of residential developments, as weakness in segments of the residential market starts to depress prices.
Agents are downgrading their outlook for central London home prices, amid evidence that developers are abandoning residential conversions. And housebuilder Barratt has appointed agents to sell a portfolio of more than 300 unsold central London flats, in a wholesale deal designed to appeal to institutional private rental investors.
Residential developers who still have their eye on sites will now be wary of over-committing, as their fallback route to profitability, the viability assessment, is becoming tougher to finesse. One Westminster official recently declared publicly that overpaying for sites took place far too often, with the chipping down of affordable housing commitments was an established way of recovering profitability. Greenwich council has now demanded any viability assessment must be made in public, with other boroughs looking to follow their lead.
Agents JLL have downgraded their central London residential outlook, marking its previous 1% price rise for 2016 down to an expected 3% fall. They blame a deepening of economic uncertainty, and the chancellor’s application of an extra 3% stamp duty charge on purchases. Others are less optimistic, with Morgan Stanley pencilling in a 10-20% fall in top end residential prices, as part of its outlook on Capital & Counties, which has its major Earls Court residential project to build out and sell.
Mike Prew, an analyst at Jefferies, has predicted a 20% drop in values for new apartments in high rise towers, and has talked of “a messy shoot-out between competing developers” in Nine Elms, where up to 18,000 homes could be built – but only if demand holds up. Other analysts suggest that more than 1,000 off-plan apartments in Nine Elms are being offered for sale by opportunistic purchasers, who paid a deposit but thought they could flip their investment for a profit.
The large volume of central London pipeline is also persuading developers that uses other than residential may be preferable. At the Portland House block in Victoria, owner Land Securities is reported to have been extending the leases of office occupiers, apparently abandoning plans to carry through a permission to convert the 29 storey block into 206 apartments.
And developer Derwent London has cancelled a redevelopment of its head office in Savile Row, where the company won consent last year for 29 flats instead. Derwent’s John Burns explained: “Escalating residential construction costs and increases in stamp duty, alongside rising office rents, led us to reconsider this approach. We are now refurbishing the office space instead.”
The issue is not confined to prime central locations. In Hammersmith, developer London & Regional Properties has abandoned plans to develop the former offices of architects Rogers Stirk & Partners into luxury flats, despite having a £35 million, 57 apartment scheme approved by planners in 2015. The riverside studios will instead be revamped and continue to be office space.
And research by London Central Portfolio points to a problem with the volume of high value new build flats in central London, which are generally sold with a premium that evaporates on the second hand market, dragging down values.
LCP says that £6.9 billion of new build sales were made across all 33 London boroughs, in 2015. Of these, more than half the value was in the 11 inner boroughs, representing 4,743 homes sold. And, with values much higher, Westminster and Kensington & Chelsea accounted for £927m of sales, but just 467 units.
These prime boroughs see continued limited land supply, ensuring a restriction that prevents oversupply. However, LCP says the situation in the other nine inner boroughs is very different: “In a market which is heavily saturated with new developments, with 75,229 in the pipeline, there is a risk to buyers of a substantial oversupply of such units, both to buy and to rent, suppressing yields and prices.”
Barratt’s move, reported by Estates Gazette, sees it looking to sell flats in Fulham Riverside, Nine Elms Point, Hendon Waterside and Aldgate Place. However, it is reported that only the Nine Elms block is being offered as a complete unit; the other blocks have already seen some apartments sold off to single purchasers. Such pepperpotted purchases are not favoured by PRS investors, as a mixed block is harder to manage. If sold individually, the apartments would have a sale value of £320 million, though a bulk discount will be expected.
There is also evidence that residential developers are being less aggressive when bidding for sites. Hotel developer Shiva won a Welbeck Street, Westminster car park site for redevelopment last month, emerging top of 16 bidders including, apparently, residential developers.
JLL says it is higher stamp duty that has had the biggest impact, slowing sales of properties costing more than £1 million. And this will have two unintended consequences. First, the chancellor will get less tax in than he might have expected. “Secondly, and more devastating for London’s vitality, is a reduction in the supply of new homes at a time when London needs to see dramatic increases in development activity.”
The JLL researchers also warn: “Furthermore, the change has made higher-density schemes demonstrably more risky, increasing the burden of new supply on suburban and greenbelt locations.”
LPA Perspective: The problems now being seen in the central London residential market are not a surprise to everyone. Plenty of developers and housing associations had already moved out to zone 2 locations, where they can still make the numbers work. So while the centre implodes, there is still a doughnut of activity in the outer boroughs, delivering less expensive homes.
The market for £1 million plus apartments in central London has been satiated. The market has weakened, delivering an outcome the planners had hoped for, but were unable to deliver; there will be less office to residential conversions.
So, what happens next? If expensive luxury flats cannot be sold at the planned prices, then they either need to be sold for less – with someone taking a financial hit – or, if they are not yet built, schemes need to be redesigned, to deliver alternatives. That could mean business space, which would satisfy many boroughs, led by Westminster, who have lost employment space. Or it might mean new, more dense schemes delivering more sensibly priced homes that a decent volume of Londoners can afford to buy or rent.
There has been much hand-wringing, as developers secured permission for luxury apartment towers, then jumped on a plane to Beijing or Singapore, to sell the flats off plan. But was this a failure of planning, either locally or at a strategic, London-wide level, by allowing a niche market to be saturated – while there is a shortfall in delivering homes at prices people can pay?