The rising number of unsold new-build flats in London is changing the way homes are sold and could result in big price reductions alongside opportunities for owner-occupiers.
LonRes is this week launching a product that will connect soon-to-complete new-build developments with local London estate agents, who can then sell flats to “walk in” buyers on a large scale for the first time.
The vast majority of new-build flats are normally sold off plan to investors from the UK and overseas as owner-occupiers cannot wait three years to move in.
However, because of the slowing London residential marketplace, especially in central London, thousands of flats are completing but have not yet been sold.
EG Residential Research, which registers all completed units, not just those officially for sale, says 9,214 homes are currently available.
“All the statistics and data show a slowdown in sales to overseas investors, and changes to taxation, so developers cannot rely on the market they have relied upon for the past 20 years,” says Anthony Payne, managing director at LonRes.
“That market has gone, and developers and their instructed agents need to think of markets they can sell to.”
The pressures at completion
LonRes’s ResDev product connects developers and their investor-orientated marketing suites with its network of 6,000 London estate agents. A couple looking to buy a two-bed flat in Kennington, for example, would be shown a nearby new-build development as well as secondhand stock.
While Rightmove and other online providers can list some new-build stock, this product is the first to allow developments to be offered across all the capital’s physical estate agents.
It will market schemes due to complete in six to 12 months alongside those already opening their doors.
Developers do not want units left unsold after completion, when debt is due and marketing and sales suites are a lingering cost. They want to move on to the next development,” says Katy Warrick, head of London residential research at Savills.
“It’s pressure from their lenders, which give developers a number of milestones. These developers would do almost anything to avoid having stock on completion.”
This could lead not only to developments previously unavailable being marketed to owner-occupiers, it could also mean discounts, especially when the alternative is a costly bridging loan.
EG research shows that by the time a scheme completes, developers are willing to take a discount of 9% on average from asking prices.
Payne says that although an owner-occupier will not sell if the price is too low, a developer will essentially do what its spreadsheet dictates.
“Ownership is emotional, and it’s hard to come to terms with a drop in price. With a developer, it’s a simple business proposition and an opportunity,” says Payne.
Payne says this is the first time in 20 years that units are being marketed on a large scale to owner-occupiers. It’s a huge opportunity, he adds.
“We think there is opportunity for everyone. This includes developers, traditional estate agents – if they are thinking laterally – and buyers. They have the whole market,” Payne says.
Shifting the London development pipeline boundaries
In the short term, it’s a market that could expand considerably.
Savills says that between 2013 and 2016, 13,500 more homes were started than sold, and that the number of unsold new-builds hitting the market will rise.
The problems, says Savills, are that much of it is expensive and there is a large mismatch in demand and supply. It estimates that 58% of demand is for homes costing less than £450 a sq ft, which accounts for just 15% of the five-year supply.
Meanwhile, the £1,000 per sq ft-plus market accounts for nearly half of the 13,500 overshoot.
This, of course, could lead to a substantial drop in pricing, which is why developers could be keen to start paying more attention to the domestic market.
Adam Challis, head of residential research at JLL, says: “A higher proportion of unsold stock at completion will play to owner-occupiers, who tend to prefer completed product.
“Expect developers to broaden marketing attention to include this market segment. Buildings that are better at promoting placemaking and liveability will find greater appeal. Domestic buyers are likely to see some fantastic opportunities emerge.”
Warrick says that while completions are expected to rise this year, they are set to tail off afterwards, as construction starts slowed when the market turned.
She also points out that while there has been a slowdown in the domestic market, overseas buyers remain active in London, where property prices are essentially 20% cheaper after the pound’s recent drop in value.
“In terms of the investor market, there has been a reduction in the number of UK investors, but the overseas market is still there. We have seen an increase because of the weak pound,” she says.
“In terms of the prime pipeline, there is a lot coming through, but starts are falling. This problem is not going to carry on getting worse and worse.”
On the other hand, a spokesperson for one London estate agent said the overseas and investor sales markets are changing.
“Buying off-plan was always to hedge against price increases, but if the markets not moving, why part with your money early? Better to wait, see that the development gets delivered on time and to a good spec, and then buy, probably at a discount,” the spokesperson said.
The new LonRes product will aim to open up a new market for these new-builds. But with affordability still stretched, there could be further price corrections first.
To send feedback, e-mail alex.peace@egi.co.uk or tweet @egalexpeace or @estatesgazette
The developer’s viewpoint
Jonathan Vandermolen, IMA Real Estate
We’ve Brexited, been Trumped and have no majority in the House of Commons. As Laurel & Hardy used to say, what a fine mess we’ve got ourselves into.
What impact does all this have on the new-homes market? Nothing good from a sales perspective, as the market that started slowing 12 months ago is now going nowhere fast.
My understanding is that in London, 30,000 homes are under construction and 3,000 completed but unsold. And as the vast majority of the market is still dominated by investors, why should they buy now when they could wait and get discounts?
From an owner-occupier’s perspective, it is good news, as falling values can make some areas more affordable and allow those that wish to buy a home to do so. But the basic problem is that zones 1 and 2 are still out of reach for everyone that does not have the help of “the bank of mum and dad”.
And in the more affordable zones – zone 3 and outwards – what has been dominated by Help to Buy is fast becoming Help to Sell. While the government’s program was a great way to give first-time buyers a leg up, it has massively increased values for any new home up to £600,000, taking them massively ahead of any similar-sized secondhand property. This is very dangerous.
Overall, the market has grown in terms of value far too quickly.
What we need is an adjustment, and a big one, but with the property business famed for putting its head in the sand, we will not see the full impact until most of the stock is completed and unsold.
Don’t get me wrong – the market has not completely collapsed and there are deals being done. But you either need a unique scheme of the highest quality or a reason for people to buy. And that’s price.
So what’s the likely outcome?
I don’t know if it’s because I’m old, but this is the quietest market I have seen for three decades. I’m expecting a quiet summer – a good opportunity to top up one’s tan – and the rest of the year not looking much better.
But 2018 may see some action, as completed, unsold schemes put developers under pressure from their borrowers, forcing them to sell at the best price they can get. There may even be a bargain or two.
