So summer is over, we’ve Brexited and there has been a little throwing of hands in the air over the market – or lack of it.
The sum total of all this excitement is we are all in agreement that the market is overvalued in every sector, has been for some time and is unlikely to go anywhere fast in the next 12 months.
The residential land market has rocketed over the past three years owing to the growth in values of new homes, most of which has been the responsibility of overseas and UK investors. These investors are generally not property people, but those whose cash has been burning a hole in their pockets, looking for income as the traditional investment methods such as banks, bonds, gilts and long-term securities do little or nothing in terms of returns.
The truth is we have all been made to look a lot more clever than we really are during the past three years. Pretty much anyone who bought anything made either decent or better-than-expected returns. If they were a little too aggressive in their enthusiasm to get into the market, they got out of trouble owing to the speed of rising values.
Today, things are somewhat different.
Despite what some of the big firms will try to tell you, the top end of the central London market – and by this I mean above £2m – is dead. Everyone agrees the market is overpriced. With little or no growth expected, there is no reason to buy, particularly off plan.
Yes, for overseas buyers the weakness of sterling helps, but with more than 5,000 units expected across W1, W2, W8, W11 and SW1, SW3, SW7, at average prices of £3,000 per sq ft, that’s a GDV of around £1.5bn of sales.
Come lower down the scale and any supposedly half-decent area in and around zones 1 and 2 is £1,000 to £1,500 per sq ft. From Elephant and Castle to Queen’s Park, Nine Elms, Hammersmith and Hackney. Everything is at least a grand. Convert this into actual values, with one-beds at £500,000-£750,000 and twos at £750,000- £1m, and a pattern starts to form. Once you take the investors out of the market, few can afford these flats.
As for the land itself, buying has been tough for the past 12 months and there have been a number of new challenges.
Values have been rising owing to newcomers who are generally working with other people’s equity and lacking experience – and in many cases basic knowledge – pushing margins so they can just buy something.
It’s easy to make any deal work through a combination of cutting your build cost by 10% and upping sales by 10%. It’s justifiable because you tell yourself you will create a superior product, and if you are taking planning risk, everyone tells you not to worry about affordable housing as viability studies will deal with that issue.
Add to this too many vendors with unrealistic expectations due to paper profits or having paid too much for the site, and with build costs still rising, planning not the slam-dunk everyone tells you it is and sales values slowing… you simply can’t afford to sell.
The other problem with many land owners is the market is so congested that the first point of contact many have is from either an agent desperate for instructions and likely to overvalue, or a principal looking for control of a situation and who submits an undeliverable offer.
By way of example, as a business we have offered on 25 sites this year, bought three – in Catford, Lower Sydenham and Greenwich – lost out on another three, while the remainder are still available.
We have been offered a further 700 opportunities, which have either not been suitable for us or just so overpriced we haven’t bothered. Of these, only 28% are sold or withdrawn – which tells you all you need to know.
I would suggest that many banks and equity investors take a long look at either the people they have lent to or the location of some of their loans. I’m not suggesting that the market will crash (there’s too much cash around and interest rates are low), but there must be a correction.
It could take up to six months before we see any real action. Some agents will almost certainly go out of business, stamp duty must come down and then, eventually, interest rates will go up.
In the meantime we are still buying, but the price must reflect the risk.
Jonathan Vandermolen is director of IMA Real Estate
