Market Sentiment & Lateral Thoughts

from Neil Behrmann and other authors

New London developments come on stream as property prices stifle demand

September 2012:- The reason for the surge in completions is that developers boosted construction between 2009 and 2011 on expectations that there would be a boomlet in property demand because of the Olympic Games. According to Drivers Jonas Deloitte’s recent “Crane Survey” which monitors developments some 239 development schemes with more than 38,000 units are currently under construction. Most of the developments are in south east London near the Olympic Park, but there are  a few in central and north London.

The most keenly awaited development will be the conversion of some 2,800 units which have been temporary residences for thousands of competing athletes. These units will be developed into apartments in a new neighbourhood, to be known as East Village. This development is only the first phase of the Olympic legacy as the aim is to eventually provide homes in Stratford surrounding the Olympic Park of some 15,000 homes. The homes in East Village will include a variety of apartments and houses for private buyers and other units that will be available for rent at affordable prices for lower income groups. A total of 1439 homes are owned by the consortium Qatari Diar and UK developer Delancey that purchased the Olympic Village development last year for pds 557 million (S$1.1 bn). The remaining 1,379 homes are owned by Triathlon Homes, which is a partnership between First Base, East Thames Group and Southern Housing Group. Some 348 homes will be available as deals that involve part purchase and part rent. Others will be at discount rentals. Berkeley Group (including subsidiaries) remains the most active residential developer in Greater London, according to agents.

Volume of completions the highest since 2009

Drivers Jonas Deloitte’s data show that the volume of completions is not only up on last year, but is currently at its highest level since 2009. These are the schemes which began in 2010 and 2011 and are now progressing through to delivery. The largest proportion of developments are in the south east of London, not far from the once derelict land which has become a magnificent Olympic Park alongside Westfield Park, a huge modern shopping centre only six minutes by train from Kings Cross and St Pancras the embarkation sport for Eurostar. After a jump in residential real estate prices, most notably in London’s prime areas in 2010 and 2011, however, local and foreign buyers have become cautious, estate agents and analysts say. Apartments and houses are relatively cheaper in south east London, but such is the concern that developers are now holding back on new projects Drivers Jonas Deloitte and analysts say.

Mathew Evans-Pollard, head of London development, Drivers Jonas Deloitte, said: “London remains a two-tier market with developers continuing to focus on the Inner London boroughs. There appears to be a resurgence in West and South West London as a number of larger schemes have broken ground.

“Sales values seem to be holding up in Central London and although there remains strong demand from international buyers, there are signs that parts of the Asian investment market is starting to slow.”

Rental yields shrink, showing that landlords seeking capital appreciation

 According to James Wyatt, Head of Valuation at estate agents John D Wood gross yields on rentals continue to be at low levels of 3.3 percent on apartments and 2.9 percent for houses. After deducting agent and management fees, maintenance, other charges and tenant voids,  net rental yields can be estimated at only 2.3 percent for flats and 2 percent for houses. John D Wood will be updating its price and yield index in September, but anecdotal evidence from agents is that the net flow of foreign money i.e. purchases less sales has begun to taper off this year. Although there has been some buying from Italians, Greeks and Middle Eastern investors, Asians have been wary of hefty prices following the jump in values in the past two years and low returns. 

Overseas buyers remain committed to central locations because of global economic uncertainty,” notes Savills, estate agents. London’s prime residential values rose by an average of 0.9 percent in the second quarter of 2012, but annual price growth slowed to 6 percent, as some of the heat came out of the market in the summer.”

Ed Stansfield  head of property research at Capital Economics notes that prime  and other areas in London have outperformed the northern UK and midlands by a wide margin in the past two years. But if property prices continue to fall in the UK because of the weak economic climate the chances are that London will follow suit at some point, he notes.

“One potential trigger for this could be recent signs that London’s labour market is witnessing the  shedding of jobs,” he says. “ “Indeed, our forecasts assume that employment in London will suffer above-average falls over the next year or two. if we are right and the eurozone begins to break apart over the next 12 to 18 months, London’s reliance on financial services could be a major handicap.”

“In the short term, however, the supply and demand balance remains far tighter in London than elsewhere,” adds Mr Stansfield. “That suggests that even if the labour market does weaken,the effects on prices may take time to come through.”

Tagged as:

Comments are closed.