The Nine Elms problem is one of over supply

Partly because it is back in the news ( did it ever really go away?) and partly due to the nicer weather I cycled past Battersea dogs and cats home yesterday heading up to Vauxhall which gave me a cyclists eye view of the Nine Elms and Battersea Power Station developments. One simple measure is that it takes more than a few minutes to do this which gives an initial idea of scale. Another is my crane count which has now reached 32 as opposed to the 24 or 25 of the past. So activity is rising which of course is in the opposite direction to the official UK construction series but of course for me there is a type of locality bias here. Also if you cycle through the development as I did a couple of months ago you find that adding depth to height and length adds even more to the scale.

The Financial Times has been on the case too.

Battersea luxury homes scheme powers on despite oversupply fears

Frankly I am not sure what choice there is now but let us look deeper.

Now surrounded by hoardings and scaffolding, it lies at the heart of one of the most ambitious redevelopment schemes in Britain’s capital, with nearly 40 sites, owned by domestic and overseas developers, clustered in the surrounding 561 acres known as Nine Elms.

So nearly 3 Battersea Parks and there was an effort to pinch some of the park as well back in the day which fortunately was rebuffed. This has led to this.

It is four years since the prime property market peaked in London, but estate agency group JLL estimates that 3,323 upmarket homes are under construction and another 6,332 in the pipeline across the wider Nine Elms area. The volume of homes planned for the area has prompted fears of an oversupply of luxury properties that most Londoners cannot afford. According to JLL, properties in Nine Elms command £1,400 per sq ft on average, while landlords investing in one-bedroom flats can expect to command £450 a week rent.

This takes me back to February 7th when I noted this from the Guardian.

More than half of the 1,900 ultra-luxury apartments built in London last year failed to sell, raising fears that the capital will be left with dozens of “posh ghost towers”………The total number of unsold luxury new-build homes, which are rarely advertised at less than £1m, has now hit a record high of 3,000 units.

I guess ghost towers are a special(s) case of a ghost town.

Do you remember the good old days
Before the ghost town?
We danced and sang,
And the music played inna de boomtown

Prices?

Back in February the FT was telling us this.

Prices per square foot in prime London have fallen 5 per cent since their 2014 peak while in the most expensive “prime central” areas they are down 11 per cent.

Whereas now it is giving us examples of larger falls.

A glance at property listings online reveals hefty discounts being offered as owners cut overblown prices. A one-bedroom flat in Aykon London One, a 50-story tower planned by Dubai-based developer Damac Properties, is being offered at £1.1m — a 36 per cent discount to its initial £1.7m price in November…………
Elsewhere, a five-bedroom penthouse is available for £11m — it was listed at close to £14m six months ago. Property agents say many vendors will be investors who bought off-plan early and no longer wish to complete.

What we do not know is how realistic these asking prices were in the first place? Also if you had bought off-plan as it is called then rather than take a 36% loss if that is what it is then you would presumably simply abandon your 10% deposit.

Number Crunching

There is the issue of value which of course is in this instance a little like asking how long is a piece of string? However a reply to the FT article from B gives it a go.

Work out the numbers with stamp duty, Agent fees, maintenance costs etc and the yield works out to 1.5% per annum for a cash buyer in an oversupplied market with limited prospect of capital gains at least for some years.

Assuming the FT data is correct then applying my rule of thumb for such matters means that the price needs to halve. Of course central London runs down a different road but this from Vanessa Warwick in January provides some perspective looking at a house in Newcastle.

*Trending* Is this 3 bed terrace for £39K with £550 pcm rental income a deal?

Actually if you look into it the start price seems to have been more like £55k but on that basis our Nine Elms yield just gets worse. It would also appear from the comments that the area might be what has become called a “sh*thole” by President Trump but then of course according to him Nine Elms is an “off location”.

If City-AM was right last week perhaps someone will be along.

The number of buy-to-let investors in the UK has hit an all-time high of 2.5m in the latest tax year. According to research from real estate agency Ludlow Thompson, the number of buy-to-let investors has increased five per cent in the last year, and 27 per cent over the last five years.

Mind you with rents in London falling I am not so sure about this bit.

Rising numbers of landlords shows the enduring appeal of buy-to-let, particularly in London,” said Stephen Ludlow, chairman at Ludlow Thompson. “The long-term picture for the buy-to-let market remains strong.”

Notice the use of “long-term” which in this instance appears to mean strong in spite of falling prices and rents. Mind you for some in central London his long-term may have come true. From Acadata this morning.

This is, however, almost entirely due to a massive 30.7% annual increase in the average price in Kensington and Chelsea,
London’s most expensive borough – and that largely the result of just seven high value property sales

lucky number 7?

Mortgages

It is hard not to think of the famous quote by Karl Marx after the news from the weekend.

History repeats itself, first as tragedy, second as farce.

From This Is Money.

The Post Office has launched a mortgage designed to help first-time buyers get onto the property ladder without the need for a deposit.

The deal – known as the family link mortgage – works by giving the first-time buyer a 90 per cent loan-to-value mortgage secured against the property they’re buying plus an interest-free five-year loan secured on a close relative or parent’s home.

There’s a catch – the parental home needs to be mortgage-free for the buyer to be eligible.

But unlike alternative family mortgages, this one costs the parents nothing so long as the buyer repays the loan on time.

This may not be of enormous use at Nine Elms due to the maximum size being £500,000.

Comment

There is a fair bit to consider here although some seem to have made up their mind before it even began. The perhaps aptly named Tony Islington in the FT comments.

Stuck in the wastelands of South London…..

Perhaps he drives a London black cab but whilst some parts of the area have stunning views over the Thames there are also some like this.

You have different developers putting up “luxury” towers and blocks cheek-by-jowl.  As a resident. your view would be either that of a neighbouring development or a set of railway tracks leading into the busiest railway station in the country.   Virtually all residents have on the ground is a giant supermarket. ( Nguba )

If anybody spots the giant supermarket please let me know. In the end the project will be reliant on foreign buyers as there are so few in the UK who can buy at these prices. But there is a flow of businesses to the area as this from the Wandsworth Guardian points out.

Dorling Kindersley (DK), the world leading illustrated reference publisher will move to One Embassy Gardens in Nine Elms from their 80 Strand Office by 2020……..DK have chosen to join colleagues from its sister company, Penguin Random House UK, whose move was announced in December 2017. The move is in line with a general shift in the media and publishing industries, with Apple to soon unveil London headquarters within the Nine Elm’s district.

But for now it looks like a classic case of over-supply.

R Lee Emery

The drill instructor who was so terrifying in Full Metal Jacket has sadly passed away. Let me leave you with this from him.

Here, you are ALL equally useless!

 

 

 

Advertisements

What is happening to house prices in Central London?

There has been a fair bit of news on the UK housing market in the last 24 hours and some of it has struck rather close to home for me anyway. Last summer I reported that there were signs of trouble in the developments at Nine Elms which for those unaware of the geography is just south of the river Thames between Battersea and Vauxhall. It is an area which is a large building site as it is being redeveloped wholesale and will include the new site for the American embassy. It extends at one end to Battersea Power Station where recently there have been ch-ch-changes too.

Battersea Power Station

This morning City-Am has reported this.

More than 50 luxury flats on sale at London’s iconic Battersea Power Station have had their prices slashed since January, with some seeing discounts as large as 38 per cent in a sign that wealthy foreign investors are scrambling to desert the scheme.

There is more than a little hyperbole in that quote so let us examine the basis on which these claims are being made.

Property firm Propcision has found that 197 properties have been listed for resale by the developer’s in-house agency, Battersea Power Station Estates, since last year. Around half the properties have had a price reduction at some point since the start of the listing with 76 of those units being reduced since the third quarter of last year.

This adds to the mood music created by the London Evening Standard earlier this week.

How worried should investors be at the wobbles in Battersea’s luxury flats market? For the FTSE 100 property boss discussing the matter over his turbot the other day, very.

 

So concerned was he at the speculative bubble inflated by off-plan buyers in the sky above the Thames that it was reminding him of the monster crash of the early Nineties.

In particular, he remembered the de luxe Point West development in Cromwell Road, which went bust, unfinished, in 1990, triggering a flurry of other luxury failures.

There is a symbolism here as for those too young to remember or indeed abroad the early 1990s saw something which will chill every central banker to their spine which is sustained house price falls in both London and the wider UK. Or to put it in musical terms “The Only Way Is Up” by Yazz was replaced on the turntables by “I keep on fallin'” by Alicia Keys.

There is much to consider here because if I take off my local residents hat there are two powerful economic forces at play. Before I completely take off my local residents hat Battersea Power Station looks very impressive and indeed stunning from the other side of the Thames and is an enormous site. Of course Pink Floyd got their long ago when they flew a pig above it for an album cover.

Currency Wars

As so much of central London property has gone to foreign buyers the issue of exchange rates is as important as house prices and indeed can be more important. If we consider the case of Chelsea then the number of Russians moving in has led to it receiving the nickname of Chelski! However we learn a lot about the current state of play from the exchange rate. You see up until early 2013 less than 50 Roubles invariably bought you a UK Pound, whereas even after the recent dip it now takes 103. So if you are a Russian then the price of a property in the UK has doubled in your currency. This has two consequences, new buyers have to dig a lot deeper into their wallets or purses whereas existing buyers are in a large profit should they take the money home. Some must be tempted.

If we move to Battersea Power Station then many of the buyers were from Malaysia. here too there have been currency swings. In early 2013 some 4.7 Malaysian Ringits bought a UK Pound whereas in the autumn of 2015 it took 6.6. Since then there has been another swing as it has dropped to 5.8. This leaves us with two main scenarios.

  1. Some may want to book profits which may look worth taking in a volatile world for both property prices and exchange-rates, especially as both no longer look one-way.
  2. Some will have only paid a deposit and may now therefore have face of be facing losses. In their own currency the property is now much more expensive and they want to move on. They may also be facing losses on the property itself.

My London Homes Kuala Lumpur has offered its view on Twitter.

Price reductions/corrections happen regularly with new build schemes as owners speculate. No need to panic!!

Perhaps more global tours and parties are required.

Battersea Power Station is embarking on a worldwide tour in October and November 2014 to 13 cities in 11 countries….. From Friday 31 October, representatives from the shareholders and BPSDC will host exhibitions in London, Kuala Lumpur, New York, Dubai, Paris, Los Angeles, Milan, Tokyo, Beijing, Singapore, Hong Kong, Shanghai and Doha.

I doubt whether Kate Beckinsale comes cheap although to be fair she did look stunning in the pictures.

Another factor in the equation is the way that more countries are imposing currency controls or tightening what they have. Thus for those who wish to buy in London it may not be as easy as it was.

What about Help To Buy?

That does not apply right now to most places in the Power Station area as (h/t @econhedge ) the system for loans has a limit of £600,000 and the prices are too high for that. Of course it does offer a type of back stop at lower levels. However the 89 price reductions listed by Propcision since January do now include some below the limit although not this one.

Comment

What we are seeing is a consequence of two factors. Firstly some of the trends which favoured the UK have faded and the volatility of world markets especially emerging market ones is having an impact. If you like it is a consequence of the currency war concept. Also as prices have risen in both UK Pounds and the currencies of many overseas buyers many may simply have been priced out. Some “punters” may have singed fingers if they only paid a deposit.

Others may well turn up and there is a base provided by the Help To Buy schemes but that is a long way below quite a few of the prices!  If we now widen the issue we see that  central London is no longer driving prices higher in the surrounding area and some of it has as a minimum indigestion and price falls. How will our establishment respond? As after all economic policy is already heavily weighted towards the housing market and the banks. The Bank of England Underground Blog confessed this only this morning.

That means the effect of QE2 on asset prices was still notable, for example, we estimate the extension led to a 5% depreciation of the euro against the dollar anda 6% increase in equity prices.

CPIH

The UK establishment has long tried to ram this down our throats so well done to the UK Statistics Authority. I was particularly pleased to see it echo two of my points.

  • ONS needs to take more time to strengthen its quality assurance of its private rents data sources, in order to provide reassurance to users about the quality of the CPIH.
  • There is some disagreement among users about the concepts and methods that ONS uses to measure Owner Occupiers’ Housing costs within the CPIH. ONS needs to do more to explain and articulate its own judgements about the concepts and methods that it uses, and could engage more positively and openly with a wide range of users, including interested users that have a range of opinions not necessarily in accord with ONS’s own views.

I have posted my thoughts at the Royal Statistical Society Statsusernet website and engaged with the thinning numbers of supporters for CPIH on twitter which some of you may have followed. As is invariably the case the economics editor of the FT Chris Giles was on the other side of the case although his defence of what he was part of approving was somewhat novel.

CPIH is used by almost no one

Also Professor Tony Yates who used to be at the Bank of England joined in the debate although as far as I could tell he was mostly debating with himself.