Friday, March 1, 2013

Will supply spike clip London prices?

Buyers need to be exceedingly selective, warn real estate consultants.

The Business Times |  MARCH 01, 2013

London is set to experience a marked increase in new residential buildings in the next few years and the big question is whether the sharp increase in supply will place a ceiling on the heady price boom.

The new apartments are the result of a relaxation in rules which allow greater flexibility for developers to convert commercial office buildings into residential units.

Following the relaxation in regulations, agents estimate that there could be more than 40,000 new prime London apartments in the South Bank, City and West End. Examples include Shell Centre, the former UK headquarters of the giant oil company which is situated in the south bank of the Thames, Holborn near Fleet Street, and Centrepoint at the tip of Tottenham Court Road, at the end of Oxford Street. 90 Long Acre in Covent Garden, a postmodern classic building, is expected to be converted into 200 apartments.

UK developer Native Land has purchased 30 Old Burlington Street, a prime development site for gallery and residential space in the heart of Mayfair. The joint venture is with Hotel Properties Limited (HPL), the Singaporean hotel, property and retail group, and Amcorp Properties Bhd (Amcorp), the Malaysian property, engineering and infrastructure group.

An existing 83,000 sq ft office and gallery building will be turned into a residential apartment block with art galleries and a restaurant on the lower floors. The target delivery date for the scheme will be 2016, according to Alasdair Nicholls, chief executive of Native Land.

Other prime spots include 190 Strand and Albert Embankment in Westminster, and Roman House next to the Barbican residential and concert hall complex in the City of London.

Commercial building conversions are also expected to take place in Waterloo, Vauxhall, Victoria, Euston and further out at Hammersmith, Whitechapel and Ealing.

Drivers Jonas Deloitte's Winter Residential Crane Survey, which monitors new residential developments, states that residential construction activity remains close to its peak levels of the past few years.

The headline data of 236 schemes with over 37,000 units under construction, however, ''masks stark differences between locations across London''. More than 100 residential towers in London are either under construction or have planning consent, according to a report by estate agents Knight Frank. Even the 1,016-ft high Shard, the tallest building in Western Europe, sports exclusive residential apartments with panoramic views of the city.

The big question is whether the coming new supplies will cause prime area apartment prices which cost up to £3,250 (S$6,305) a sq ft, to either flatten out or subside. Illustrating the heights of residential property, prime office space is currently a much lower £2,100 per sq ft. Some estate agents believe that the rush for residential conversions could eventually cause an oversupply of residential property in the prime areas and potential shortage of commercial office space.

The boom in prime central London and some outlying areas has partly been the result of the law of unintended consequences. Wealthy buyers fleeing from the euro crisis, especially from Greece and Italy, and from surging taxes in France, have purchased property in London.

According to Knight Frank, the biggest buyers in the past year have been Russian, Indian, American and Chinese. These purchases boosted prices of apartments above £1.5 million, albeit on very small sales transactions. Thus, compared with the 16,000 monthly London unit sales in the previous boom in 2007 to 2008 prior to the financial crisis, average monthly volumes slipped below 8,000 in the autumn of last year.
Moreover, of the 7,635 houses and apartments sold in October 2012, for example, only 121 were priced over £2 million, only 100 between £1.5 million and £2 million, and 199 between £1 million and £1.5 million.

In other words, the international community is dominating low volume pricey purchases which are filtering down, making it more difficult for domestic first-time and other buyers to compete for good property.

Illustrating the froth in the market, gross yields on rentals have crumbled even further to a mere 3.1 per cent on apartments and 2.6 per cent for houses in December, according to estate agent John D Wood & Co's price and yield indices.

After deducting agent and management fees, maintenance, other charges and tenant voids, net yields can be estimated at a mere 2.1 per cent for apartments and less than 2 per cent for houses. These indices are based on contract prices of sales data used from all leading agents and developed and compiled independently by Nuffield College (Oxford) and the London School of Economics.

They show that prime house prices have risen by 25 per cent since the previous 2007 peak and apartments by 37 per cent. The acceleration took place in the past 18 months.

Taking into consideration the much higher stamp duty on purchases, legal and surveying expenses, buyers need to be exceedingly selective, warn real estate consultants. Stamp duty is 15 per cent for offshore companies for prices over £2 million. For local and foreign individuals it is 7 per cent for properties over £2 million, 5 per cent for prices between £1 million and £2 million, 4 per cent for £500,000 to £999,000 and 3 per cent from £250,000 to £499,000.

A lavish, six-floor, 10,700 sq ft Belgravia home with a gold leaf-lined 41-foot swimming pool, jacuzzi, gymnasium and cinema room, which has a record offer price of £70 million or £6,500 a sq ft, illustrates the gulf between the billionaire buyers and the ordinary London commuter.

Such is the two-tier market that Kensington and Chelsea homes now average £1.1 million and Westminster £772,000 compared with Newham at £229,000 and Barking at £211,000, according to the UK Land Registry. Average prices in the UK are £162,000 and, in north-east England, less than £100,000.

Martin Koh | 86666 944 | R020968Z
Sherry Tang | 9844 4400 | R020241C

Senior Sales Director
DTZ Property Network Pte Ltd (L3007960A)

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