THE STATE OF LONDON'S LUXURY OFF PLAN MARKET
It is no secret that central London’s off-plan market has had a tough time of late. Hundreds of apartments in new build skyscrapers have languished on the market for over a year. In October 2018 the team behind Centre Point even withdrew apartments from the market, rather than continue receiving low-ball offers which they attributed to Brexit uncertainty.
As buying agents, we regularly review ‘luxury’ off-plan property for clients. Before looking at problems with this market we should acknowledge there are some fantastic new builds in London which have successfully differentiated themselves in a crowded marketplace and sold well. However, we believe there are fundamental issues with many developments which go beyond Brexit. The fact a 10% drop in sterling since the 2016 referendum has failed to bring back international buyers in numbers supports this.
Why is London’s off-plan property struggling?
The short answer is that many off-plan properties are simply overpriced and don’t represent value compared to the rest of the market.
Here is the longer answer!
Fewer short-term investors
Premium off-plan has a supply/demand issue.
Luxury off plan is a niche market beyond the budget of most domestic buyers and heavily dependent on international demand. New builds were popular amongst Asian and Middle Eastern buyers for a variety of reasons. London was seen as a safe haven for investing after the 2007 financial crisis and many Chinese buyers associated older housing with poor quality and favoured new builds. However many previous buyers were not long-term investors and were speculating on quick returns from off-plan property. This strategy worked well until a few years ago. The London market’s recent slow-down has reduced the chance of successfully ‘flipping’ a property for a tidy sum and reduced demand from this demographic.
Lack of Fundamentals
Many £1m+ properties simply don’t live up their ‘luxury’ label.
Awkward room layouts, unimpressive ceiling heights and small bedrooms are all common issues we see at viewings. The external cladding of some developments also fails to live up to the promise of the renders. This does not mean properties in these developments are ‘bad’ per se, but it is harder to overlook issues in this price range. We recently previewed a £3 million, 2 bed flat where the master bedroom was barely 3m wide and the kitchen layout was impractical.
The amenities in many new builds can also be much of a muchness. Small pool – check, gym – check, cinema room – check. Whilst there is nothing wrong with such facilities, new builds are struggling to stand out in a crowded market. With annual service charges typically between £5,000-£20,000, developers are not only competing with amenities in other apartments but private members clubs and gyms which are often better value. Some properties do have genuinely fantastic amenities such as extensive winter gardens with stunning views but they are in the minority.
Previously developers achieved strong sales by marketing to inexperienced overseas buyers on the other side of the world. There is still significant international demand in London but the money is now more discerning and average properties are struggling to sell.
Changing Market Conditions
It can take at least 5 years from initial conception to completion of a high-rise tower. In the last few years, developers have understandably been caught out by a variety of issues.
Since 2017, Chinese buyers now have to contend with stricter capital controls at home when buying abroad.
Closer to home, 2016’s second home Stamp Duty Tax harmed the London market more than other UK cities as the tax rates are particularly punitive at higher purchase prices. SDLT on a £2m second home purchase is more than 10% (£213,750) of the purchase price. The market has had to adjust pricing to reflect this.
New tax legislation on buy-to-let borrowing and stricter lending regulations are also having a significant impact on the market.
In hindsight, these changes mean some developers overpaid for land and now face tighter profit margins.
PRIME PRICING. PRIME LOCATION?
Buyers paying premium prices expect a location to match. However, central London is not New York. It is harder to get planning permission for luxury towers in central areas and there is limited developable land. Protected sightlines of historic monuments like St Paul’s are just one of many planning obstacles developers need to overcome. Manhattan may have super skinny towers rising above Central Park but don’t expect to see anything similar near Hyde Park soon.
This has led to more remote London districts being creatively marketed as ‘prime London’. There have even been attempts to play on New York associations and rebrand Clerkenwell/Farringdon as ‘Midtown’. However, many buyers are simply not prepared to pay a similar cost per square foot for a flat in Vauxhall than for a newly renovated period property in Westminster.
Last but not least! In the short-term at least, the UK is looking economically and politically unstable to the outside world. Brexit uncertainty looks set to last till at least late March. Previously, UK off-plan property was seen as a safe haven for international money but buyers want more certainty before making a move. We believe London transactions will increase once the outcome of Brexit becomes clearer. Even in a worst case no-deal scenario, a likely further fall in sterling would finally get the attention of those standing on the sidelines.
However, Brexit is by no means the major factor affecting London’s off plan market. Whatever happens after March, buyers considering this property class should proceed with caution.
Interested in buying off-plan in London?
Finally, the good news. Asking prices aside, there is nothing inherently wrong with most off-plan/new builds in London. Each property should be judged on its individual merits. Buyers open to considering off-plan, recently completed and period property will be best placed to find value. We encourage clients to view property as a long-term investment and not fixate on short-term returns – irrespective of whether you are buying off-plan.
If you are interested in off-plan or recently completed builds, know there are limited buyers at the moment and asking prices are negotiable. Discounts in excess of 20% are achievable in some cases. Most developers have financing pressures and don’t have the luxury of the Centre Point developer of withdrawing properties from the market. Lower interest rates on borrowing is one of the few factors working for developers at the moment but this too could change.
For buyers who want a modern property, recently completed developments are an excellent alternative to off-plan. They offer buyers the security of solid price comparables and you know exactly what you are buying.
If you are interested in off-plan or any other kind of property in London, get in touch with us today to discuss your search.