A Glut on the Landscape

Financial Times – House and Homes 22nd September 2018

The drastic oversupply of prime new homes in London is going to get worse before it gets better writes Charlie Ellingworth.

Recent month have seen a slew of developers turning their backs on London. Even as big UK-wide house builders have been posting monster profits off the back of the governments’ Help-to-Buy scheme (and, in the case of Persimmon, handsomely rewarding their management boards as a result), both Barratt and Crest Nicholson have said that they no longer see opportunities in the capital. Berkeley Homes, which has been particularly prominent at the top end of the London market, has forecast a 30 per cent fall in profits next year.

The winding down of London-based activity is hardly surprising. The market has been suffering, since 2014, form a toxic brew of oversupply, rising costs and, on the demand side, the multiple whammies of stamp duty, changes to the buy-to-let taxation and inheritance tax, a tightening of non-dom rules, and the mortgage market review. On top of this, Brexit has added a currency depreciation that has made those sought-after Italian bath fittings more expensive and the Polish plumbers who install them more inclined to stay at home.

So, you would have thought there would be an immediate scaling back of new schemes in central London’s planning and development pipeline – but you would be wrong. The oversupply of prime new homes is going to get worse before it gets better.

In 2015, Property Vision commissioned research by Dataloft and LonRes into new-build supply in London. At the time, the city was covered in cranes but there was little information about eh supply coming down the road. The area we chose to focus on was roughly from Tower Bridge to Wandsworth and from the South Bank to Regent’s Park. While not a comprehensive view of London = it excludes areas such as Wimbledon, Canary Wharf and Croydon, which are seeing a lot of residential development – it could broadly be called central London. We recommissioned the survey in 2016 and again this year. The research covered those projects in the planning system but not yet with permission, those that had permission but were not yet built and those that were under construction.

This year’s research found that some 57,961 new units were proposed, in planning or in construction, 7 per cent more than 2016. In fact, more than 10,500 units are due to complete construction this year alone.

Even if you assume that a third of planning applications will fail, a third of those that have planning permission don’t’ get built, and a third of those that are under construction are already sold, this still gives a potential pipeline of 38,600 prime units over the next five years. In comparison, last year, the number of second-hand homes sold in the same area priced above £1m was 5,437, according to LonRes. So 38,600 looks like quite an oversupply.

The poor market conditions in the central London have not come out of the blue. So why do developers seem intent on soldiering on?

There may be some who are pressing ahead in the hope that, as Dickens’ Mr Micawber said, “Something will turn up” – despite intentions that Asian buyers, who are so important for the success of these schemes, are getting cold feet. But for the many developers the problem is the length of the development cycle. From buying the site, through to the eventual sale of the last unit can take at least five years, and much can change in that time. The commitment is in buying the site and many, with the glorious certainty of hindsight, paid too much and also took on too much in terms of size.

A good example of the first is the Chelsea Barracks site for which Qatari Diar paid just under £1bn in 2007. By the time the developer had fallen out with its joint venture partners, the Candy Brothers, and had the original scheme derided by Prince Charles, the development was coming out of the ground just in time for George Osborne to take his stamp duty axe to the prime London market. Although prices of eh more than £4,000 per sq foot were achieved on the first phases, things have slowed dramatically since. In a recent statement Qatari Diar said, “We are considering how best to procure the subsequent building works in an increasingly difficult construction market.” Tome, this translates as: “We can’t see how we can make money on the final stage.” The last phase may be some years away.

On the size issue, the development at Earl’s Court is the standout illustration. It is huge: 77 acres with 7,500 new residential units planned, more than the Cadogan Estate that convers much of Chelsea. Recent sales have reportedly sunk to one a week – at which rate it will take 140 years to sell them all. Again, it’s difficult to see the main site being built on any time soon.

Building-cost inflation is a problem faced by all developers and this has been running in double digits lately. In some cases, such as the Battersea Power Station project, there have been specific issues with listed status, where the costs have exceeded even the pessimistic forecasts that kept the site derelict for a generation.

This is a long way of saying that most of the sites with planning permission, but not yet built, will probably stay that way until the value of the sites goes down, allowing the end-product to be revalued (along with the developer’s share price); or the market recovers, or the cost of building subsides – or all three. A the moment, there is a hiatus among developers as the imperative of sharply rising interest rates isn’t there to force decisions - yet.

So what does oversupply in the new-build sector mean for the property market in central London? It certainly doesn’t improve the mood music, but if you are looking for a good house or flat, at whatever level, you will be surprised by the number of other people looking for the same thing. We find that lowball offers are rarely having the desired result. It’s about quality – but then it always has been.

If you own a quality home and are looking to sell it, you may not get what you would have at the top of the market, but you will probably find a buyer at a level that is higher than raw market statistics would suggest. For the mush in the middle, the going is already hard – and likely to get harder.