Research from a residential investment consultancy throws light on the extraordinary large pipeline of new homes to be built in central London, the large premiums charged on them, and the risks to investors who hope to make money on re-sale.
The research, by London Central Portfolio, says that in so-called Prime Central London there was a 20 per cent premium on new-build properties where the average square foot price for a new build stands at £1,701, compared with £1,418 for an older property.
“Iconic developments such as One Hyde Park break new ground in price, but even Fitzrovia Apartments, in the now very much ‘up and coming’ Fitzrovia in East Marylebone W1, is posting prices of £4,400 per square foot for its penthouses” says the LCP research report.
But it says the number of new units available to buy in PCL remains very restricted due to the limited land development potential and planning restrictions; in 2015, only 467 new units were brought to market and on average, this runs at 300 new units each year, protecting the area from any problems of oversupply.
But LCP claims it is a different story elsewhere in the nine boroughs making up inner London - Camden, the City of London, Hackney, Hammersmith and Fulham, Islington, Lambeth, Southwark, Tower Hamlets and Wandsworth.
These boroughs have achieved an even greater new build premium amounting to 25 per cent where the average price stands at £659,459 compared with £525,307 for older property. In 2015, there were £2.89 billion worth of new build sales, LCP says.
“In a market which is heavily saturated with new developments, with 75,229 in the pipeline, there is a risk to buyers of a substantial oversupply of such units, both to buy and to rent, suppressing yields and prices. Units in new builds can also suffer limited re-sale potential once they are no longer new and buyers have moved on to the next marketing phenomenon” it warns.
LCP also talks of one (un-named) development, launched in 2003, which reveals what the consultancy calls “significant suppression in price growth” which can be traced back to its original high premium. “Price growth lags 26 per cent behind the rest of the market, increasing just 7.3 per cent a year since 2003 compared with the PCL average of 9.3 per cent.”
Naomi Heaton, chief executive of London Central Portfolio, emphasises the issue.
“Investors are paying a heavy premium for newness which, by implication, has built in obsolescence. At re-sale, units in big schemes which are essentially commodities can only compete on price. They are also unlikely to appeal to the international buyer, the driver of the new build market, once they are second hand. These factors make them far less resilient to market pressures such as a global financial crisis” she says.
“Shrewd investors should consider buying at the stage in a development’s life-cycle when the premium has been eroded and a downward overcorrection in prices often takes place. They should also consider older property in London’s classic buildings which see much more stable price appreciation. These might need refurbishment, but undertaking this offers the benefit of an immediate uplift in value, rather than paying a premium to a developer" concludes Heaton.