Risk v Opportunity
The residential market has taken a beating over the past year and construction financing has become more difficult to come by, forcing many developers to place large and ambitions luxury development projects on hold, or cancelling them altogether. we take a close look at both the challenges and opportunities presented.
There is without question a feeling that global economic uncertainty is filtering through to the London hi-end residential market.
A quick exercise in comparing and contrasting London estate agent listings swiftly highlights the fact that current asking prices are falling, with big discounts to be had of up to 15 percent on the ticket price of desirable new high specification residential developments, including those that are highly coveted and have traditionally traded well.
London developers and investors are now bunkering down and adjusting their focus, with provident planning for future market events by taking active steps to insulate themselves against risk and generally exercising a lot more caution and conservatism in their outlook.
The rationale behind drawing back on the scale and quality of new London residential developments is down to quantifying where the volume and demand is currently centred, and that happens to be in the £1-3 million category, which appeals to important foreign buyers such as the Chinese, with that particular price range representing the ‘sweet spot’ for them.
On mixed use developments with a large residential component, developers that we spoke to are now looking to non-traditional lending to secure project finance, with one large London based listed developer, that declined to be named, revealing that they had as a measure of last resort turned to the Shanghai investment conglomerate SMI for a crucial £500 million capital injection to ensure project completion.
Similarly with another large developer active in the Canary Wharf area of London, they were candid in that having been refused primary finance they had been forced to turn to the Israeli bond market.
This departure away from traditional routes of funding well illustrates the present condition of the real estate lending market, with traditional primary funders such as BNP Paribas Real Estate and HSBC, who were both so visibly active in the recent buoyant development cycle, now exercising acute caution before extending finance and credit lines to developers seeking funding.
The luxury rental market in London is similarly experiencing the same challenges. Clients that we work with who are active in building, holding and operating properties are now making very sizeable landlord concessions, in particular offering to waive the first months rent to entice tenants appears to be very commonplace.
Through discussions with both agents and developers, we estimate that concessions and incentives are being offered on 15-20 percent of all London market rentals. Whilst not an exceptional phenomenon, it does present an increase from contrasting observations made of around 11 percent in 2016.
In conclusion, the outlook will continue to pose challenges to developers looking to secure financing for new projects, with gateways to funding available for those creative and resourceful enough with commercially viable projects that are able to work their connections in order to obtain essential funding.
Buyer profiles have always been prone to adjusting and shifting over time according to changes in the market, adaptability and shared risk through development partnerships is key to hedging against market uncertainty.