• £1.2bn worth of London new build sales already this year
• In 2013, 46% of units bought as buy-to-let investments
• On average, new build units command 20% premium at point of purchase
• Price growth for new developments lags far behind market average & suffers more volatility
• 98,330 units in development pipeline for Inner London, with most in Tower Hamlets
New research conducted by LCP, Specialist Fund and Asset Managers, on the "new build" market in London has revealed that there have been £1.2bn worth of sales already this year.
This research has revealed that almost half of all the new units (46%) are bought for occupation as buy-to-let investments. Even Prime Central London (PCL), often besmirched by a 'lock-up-and-leave' stigma, sees new build sales to BTL investors at a similar level; 40% in the City of Westminster and 52% in the Royal Borough of Kensington and Chelsea. This mirrors data from the 2011 census which shows 50% of all privately owned units in PCL are let out.
However, with large numbers of new builds being bought as speculative investments, are buyers making sound choices?
Investors pay a premium for new units, in large part due to the massive marketing hype which surrounds new developments. LCP's research has found that, in PCL, this amounts to 20%, 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 the penthouses.
Whilst the number of new units available to buy in PCL is tiny – there have only been 77 new build sales this year – due to restricted land development potential and the conservation of its architectural heritage, it is a different story elsewhere in Inner London*.
In Wandsworth, home to the well-publicised Battersea Power Station and Nine Elms developments, there are 14,306 units in the pipeline reported this year. Together, Tower Hamlets and Southwark have 33,646 units in their development pipeline. Here, prices are significantly more affordable than in PCL for aspiring investors, ranging between £325 in Bermondsey's Blueprint development and £1,933 in NEO Bankside on the buzzy South Bank. Perhaps not surprisingly, therefore, Southwark sees the highest number of BTL sales in Inner London, at 63%.
The risk to investors is that there will ultimately be a chronic oversupply of new-builds 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.
LCP have tracked the erosion of "new build premiums" over time. Taking one particularly well known development, for example, launched in 2003, their research demonstrates the significant suppression in price growth, resulting from the initial sale premium. Price growth lags 64% behind the rest of the market, increasing just 6.4% a year since 2003, compared with the PCL average of 9.6% p.a..
The development also suffered a much larger hit during the credit crunch. In 2009, prices fell right back to their 2004 level, compared with the rest of the market, where prices fell by 10% that year and remained 42% higher than their 2004 average.
Naomi Heaton, CEO of LCP comments:
"New builds are marketed off-plan at glamorous property exhibitions as speculative investments. Buy-to-let investors often see them as a hassle free alternative, which negates the need for searching and travel. They also offer a modernity which Asian buyers, in particular, associate with 'high' end. However, as investment choices, they need to be entered into with care.
"Investors are paying a heavy premium for newness which, by implication, has built in obsolescence. At re-sale, units in big schemes can only compete on price. The commodity nature of the units make the pricing less resistant to market pressures such as the credit crunch. Similarly, the rush of identical properties coming on to the market for rental means landlords are all vying for tenants at the same time, with a resultant downward pressure on rents. Investors who prefer new units should consider buying at the right stage of a development's life-cycle – after the premium has been eroded and when a downward overcorrection in prices often takes place.
"Shrewd investors should also consider older properties. These might need refurbishment, but undertaking this offers the benefit of an immediate uplift in value, rather than paying a premium to a developer. Flats in London's classical terraces and quaint mews are difficult to find but offer greater long term potential. They do not come off a production line; they are one-offs with their scarcity value underpinning price growth. This is a rare case where 'age is a virtue'."