International capital is driving ever more profound shifts in the way UK residential is being delivered.
Overseas, off-plan purchases by individual investors have provided vital securitisation that triggers development funding and puts spades in the ground. The residential development industry, employment and growth hugely benefits from this flow of capital and there is no question that supply would have suffered without it. However, a new wave of international capital is driving even larger structural change right into the heart of London’s development industry.
In this context, what does the Qatar Investment Authority/Brookfield takeover of Songbird mean for residential demand in Canary Wharf?
If past experience is anything to go by, possibly quite a lot, actually.
Over the past two years international developers and capital have transformed the landscape of large-scale residential delivery in London. Wanda, Lodha, Greenland, Oxley, SP Setia all are new names to London’s development landscape over the period, but collectively have the capacity to deliver 9,500 units of stock. Although different funding models are being used, they are generally larger than domestic counterparts and have a lower cost of capital, which allows for a decoupling of sales rates from construction activity.
Why is this interesting? First, it means that rates of new home construction can be significantly enhanced. Large-scale delivery was traditionally predicated on circa 250-300 units per annum. In contrast, SP Setia has sold close to 1,500 units and is on site with the first 800 – barely two years after it began marketing.
So this new wave of development capacity and capital is pushing the pace of delivery on large sites up by as much as five or sixfold. Those lofty Greater London Authority housing targets look just a little bit more achievable under this scenario. Boris and co, take a bow here.
Returning to Songbird, the next wave of development on the estate will take place at Wood Wharf, E14. Importantly, this includes the first residential buildings delivered by the Canary Wharf Group and in total will become more than 3,000 homes, nearly 2m sq ft of offices and 250,000 sq ft of shops, restaurants and community uses. It is worth considering the impact of this new internationalised ownership profile for residential delivery at Wood Wharf – and future residential supply locally, for that matter – when the first of these units come to market later this year.
International capital has already transformed better-known sites in the capital like Battersea Power Station, SW8, and East Village, E20, the former London 2012 Athlete’s Village. These are complemented by regional examples such as Eastlands in Manchester, where 6,000 homes will be delivered by Abu Dhabi United Group. As international capital becomes naturalised, it is forging big change, even in off-piste locations like east Manchester.
Each of these examples are fascinating in their own right, but what becomes clear is that they have all been a beachhead to further large investment in the local market. Note the recent move by ex-Setia chief executive Tan Sri Liew Kee Sin to create EcoWorld and buy £429m of the future Ballymore development pipeline, including the next phase of Embassy Gardens at Nine Elms, SW8. In total the pipeline will have a gross development value of £2.2bn and deliver 2,800 homes and 250,000 sq ft of commercial space.
Institutional capital has long since internationalised the commercial sector, managing to avoid the same level of political sensitivity as residential in the process. However, in the residential sector, international money was largely confined to individual unit sales. As the market rapidly matures to provide a platform through development for this money, many of the big supply challenges we face are being answered with vigour. Although we are still a long way from “solving” the housing crisis, channelling new capital towards the right solutions is beginning to pay dividends.
So what happens next? Barring a big shift in values we will continue to see delivery rates tick up. Build cost inflation will remain stubbornly high (currently circa 8%) for at least the next 18 months, representing some drag on activity. In terms of capital, the traditional route tends to be for overseas money, once established, to be followed by further investment into that market. Expect to see Middle East money “discover” Canary Wharf as a residential investment market much like it has – alongside the Malaysians – at Nine Elms.
It is worth noting that the planning pipeline on the Isle of Dogs south of the Canary Wharf Estate amounts to some 4,500 residential units. A risk to some perhaps; an opportunity to others given the supply constraints across London.
Adam Challis is head of residential research at JLL
