Glut of new-build properties leads to falling premiums in central London
Prices for luxury flats in some parts of London are likely to fall as an oversupply of properties erodes the premium being paid for new-builds, an investment firm said on Monday.
The latest warning of a bubble at the top of the property market has been sounded by LCP, which advises investors on the residential market and runs property funds. It said new-build properties had been selling at a premium of as much as 25%, but oversupply in some parts of the market was likely to start eroding this.
The firm’s chief executive, Naomi Heaton, said: “In LCP’s opinion, the new-build effect in inner London is likely to take a heavy toll on areas like Battersea to Nine Elms where there is extensive oversupply of new property.
“With over 22,000 units being built there, a significant softening of prices is likely in the foreseeable future until the new-build premium is eroded and prices come back in line with market averages.”
LCP said buyers of new homes in the prime central London neighbourhoods of Kensington & Chelsea and Westminster were typically paying a premium of 20%, with prices averaging just under £2m compared with £1.66m for an older property.
However, it said land was restricted in these areas, and only 467 new properties were brought to market in 2015, protecting the area from any problems of oversupply.
Meanwhile, in other areas of central London, including Camden, Southwark and Tower Hamlets, it said premiums of up to 25% were being paid by buyers of new-builds, with the average price at £659,459 compared with £525,307 for an older property.
LCP said there were 75,229 new properties in the pipeline, which mean “a risk to buyers of a substantial oversupply of such units, both to buy and to rent, suppressing yields and prices.”
Battersea Power Station Development Company would not comment on the LCP research, but commenting on sales a statement said: “Battersea power station has enjoyed tremendous support and excellent residential sales to date. Over 1,500 properties have been sold in only 2.5 years setting many new records in London for demand and sales. Positive sales continue with Phase 3 of the project, however the focus has now shifted to commercial leasing.”
On Friday it was reported that buyers of asking prices for some off-plan flats in the Battersea power station development were being slashed, with one reduced from £6m to £4m in the past year.
Land Registry data shows that 457 new-build sales have been registered in inner London in the final quarter of the year, compared with 1,468 in the third quarter. Not all transactions are likely to have been registered yet, but there have been signs that numbers are falling.
Recently the developer behind a luxury development in Earls Court said sales had slowed as a result of “ challenging conditions” in the residential market. Capital & Counties (Capco) said these were a result of “increasing supply, particularly in emerging locations, and regulatory intervention which has impacted demand.”
Stamp duty changes introduced in 2014’s autumn statement increased the upfront cost of buying a property priced at £937,500, and a new surcharge will add to this from April 2016.
A note on CapCo put out by analysts at Morgan Stanley revealed concerns about the impact of the stamp duty changes. “Affordability is an issue, we believe, but that is not the only reason – lower demand from overseas investors, Brexit risk and UK buy-to-let reforms matter also,” the researchers said. “We are assuming a 10%-20% fall in new-build high-end residential pricing in 2016.”
Henry Pryor, a buying agent for wealthy clients, said developers had exhausted the market for overseas buyers.
“The transaction friction is too high thanks to changes wrought by Conservative chancellor George Osborne and the overdue death of the ‘invest for capital growth’ strategy which has been exposed as just gambling, as I have said all along,” he said.
“You can’t accept a 3% gross yield in property. It needs to be over 6%, even in this age of artificially low interest rates, because the carry cost is too high. Take out voids, dilapidations, letting and management costs and you are soon looking at negative net yields. This may be OK in the fantasy world of central banks but in property this results in capital values falling.”