09 August 2023

All that glitters is not gold.

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London’s new builds have always been in high demand, especially amongst wealthy international buyers. Of the £1.5 billion invested in Mayfair properties worth £5m or more last year, three-quarters was spent on new builds.

The attractions are clear: sparkling, fresh-from-the-wrapper fitouts; decent security; modern amenities like air conditioning; good energy efficiency…and all within walking distance of the city’s hotspots.

For anyone looking for a pied-à-terre in London, new builds can be the ideal solution. And with some developers now offering guaranteed yields of 4% for three years or longer, many find the investment case just as appealing.

The view from the top.

Despite the pressures bearing down on the wider property market, appetite for the most desirable new builds is greater than ever.

In areas like Belgravia and Mayfair, there’s a highly finite supply of larger units. Given the restrictions imposed by the City of Westminster and the Royal Borough of Kensington & Chelsea, which limit the maximum size of any new build to 1,700 square feet, the situation’s only going to get tighter. Even if the councils backtrack, as some developers predict, there’s going to be a lengthy lag in supply. This will inevitably push up prices.

At the most rarefied levels, branded (often hotel-led) propositions are booming. Twenty Grosvenor Square trades heavily on the fact that it offers the world’s first standalone Four Seasons residences with interiors by Finchatton. Completing later this year, the OWO Residences by Raffles – situated on the site of the Old War Office in Whitehall – is playing the same game. The logic is sound. The wealthiest investors are magnetically drawn to the promise of luxury on tap, especially when it comes from names they trust.

Naturally, high demand brings its own challenges. However deep their pockets, would-be owners of these plum properties will face strong competition. Getting to the front of the queue is imperative, but easier said than done. Working with the right advisor is the surest way for buyers to secure pole position.

If the top-end looks bulletproof, the picture in the mid-market is much more complex.

A surfeit of supply.

When it comes to new builds, we’ve long argued that London faces two fundamental problems: too much mid-market stock and too many cookie-cutter developments.

Research we commissioned in 2021 identified 58,000 private units in the prime London development pipeline. Just 10% of these were in prime Central, with the bulk scattered along the banks of the Thames. Most were large-scale projects, with 50 different schemes set to deliver a minimum of 250 units each. While the rate has slowed a little since then, data from Molior London shows there are still plenty of planning applications being lodged.

The issue is not just that this represents a huge mouthful for the market to swallow. It’s that too much of it tastes the same.

Walk east from Chelsea Bridge and you’ll soon get lost in a swamp of identikit buildings. Inside, they feel even more interchangeable. As one investor put it: “If you buy prime property in London, you want it to feel like London – not China.” And she should know; the investor is Chinese herself.

This is bad enough when you’re buying. It’s even worse when you’re selling. Even before the recent interest rate rises, many owners were struggling to secure reasonable offers for flats they’d bought new.

Traps for the unwary.

In a detailed investigation , the FT pinpointed two more problems that owners can face: “Many feel like their service fees have surged while their homes sag at the seams.”

Stuff happens, of course – but there are certain developments where the build quality simply isn’t up to scratch. Reports abound of hot water and heating outages, leaking toilets, poor noise insulation and unkept communal grounds. In one building the FT visited, residents complained of nosebleeds and fainting spells during summer heatwaves as indoor temperatures reached 37°C.

To add insult to injury, owners are often exposed to rapidly escalating service charges. Annual increases of 10% are standard, and 30% is not unheard of. Charges in some developments have now reached £20 per square foot per annum. For investors looking to rent out a property, that’s either a substantial cost to pass on or a big bite out of the yield.

Finding diamonds.

New builds feel – and indeed often are – easy to buy and easy to live in. But investors should never assume they’re a one-way ticket to prosperity. The reality is that the market is riddled with pitfalls, especially for those buying off-plan or sight unseen.

Overall, however, we’re big fans of the sector and have been for 40 years. If buyers exercise due care and attention, there are still exciting opportunities out there – albeit fewer than there once were.

Two recent stories illustrate what can be achieved.

A client briefed us to find a £10m house in Knightsbridge, with a minimum of six bedrooms, to accommodate different family members when they were in London. Certainly not an unachievable objective – but also not one where options would be thick on the ground.

During conversations, it became apparent that the client had concerns about having to open up the whole house every time someone visited. They were also worried about maintenance and upkeep.

We proposed an alternative solution, identifying two adjacent four-bedroom flats in Battersea Power Station. We also recommended purchasing four studios in the same development. By buying six properties, the deal qualified as a commercial transaction and reduced the client’s stamp duty liability to 5%.

The total cost came in at just under £10m. All of the rental units have been successfully let, and the main apartments provide a better, more flexible answer to the family’s needs.

Prior to approaching Property Vision, a second client had been advised to invest an inheritance windfall in a range of new builds across Soho, Fulham and Nine Elms. Boris Johnson once described the Vauxhall Nine Elms Battersea opportunity area as the “greatest transformational story in the world’s greatest city” – but our client wasn’t entirely sure she believed him.

She came to us for a second opinion. In reviewing the proposed portfolio, we identified one clear – albeit poorly fitted out – diamond. We brought in a team of planners and builders to refurbish it, eventually letting out the unit for a record price within its building.

With her bank willing to loan 90% of the asset’s value, we then helped her acquire and improve a similar property with equally positive results.

There’s good learning here for anyone looking to invest in new builds. One of the sector’s oddities is that highly desirable properties are often situated in the same building as decidedly average ones. Finding these special opportunities takes time, effort and a large slice of luck…unless you’re working with an advisor who has their finger firmly on the pulse.

Caveat emptor.

“Buy in haste, repent at leisure” applies throughout the property market – but especially to new builds. Far from being the easy solution they appear, the asset class is fraught with complications. Cutting through the complexity requires the right knowledge, the right contacts, the right data and the right negotiating skills.

For buyers who do navigate the minefield, however, the rewards are plentiful. Choose well, and a new build will provide both an enviable lifestyle and a strong return on investment.

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