Wanted: a soft landing

With prices rising rapidly, commentators are split over the possibility of a glut of high-priced city-centre apartments hitting the Newcastle market. Adrian Morrison reports While concern is voiced about the imminent decline of house prices in London and the South East, Newcastle’s residential market is experiencing its most buoyant phase of recent times. Prices have risen by around 25-30% in the past 18 months. At East Quayside, they have risen by almost 50% over three years. This has caused near hysteria as investors, owner-occupiers and developers have sought to cash in on the seemingly inexorable rise. At City Lofts’ St Ann’s Quay scheme, 91 units were sold off-plan in the first four months, according to joint agent Knight Frank. And enthusiastic buyers camped out overnight to secure units at Curzon Place on Gateshead Quays. But some in the market are concerned that the boom will lead to an oversupply of the more expensive units as the number of buyers for £150,000-plus apartments declines and investors fail to let expensive flats. Research from Gerald Eve indicates that almost 4,500 units are under construction or proposed for Newcastle city centre, including Baltic Quays in Gateshead. This is a far greater number than most people believe is the case. Unfortunately, given developers’ reluctance to announce prices before completion, it is impossible to determine the ratio of expensive to affordable apartments being brought to the market. However, there is no shortage of affordable housing in Newcastle. And earlier developments have provided significant numbers in the £150,000-£250,000 range. Referring to the city centre, Bellway Homes North East managing director Barry Miller says: “Oversupply is possible, without a doubt.” He acknowledges that Newcastle has been undersupplied and that had to be dealt with, but believes future demand will come from owner-occupiers. “That is the side that makes a market strong, and that is catered for in thesub-£100,000 market,” he states. Football team Some commentators say, however, that there is too much stock above this price bracket in the pipeline, and demand will be stretched. Alluding to the region’s small number of high earners, one agent quips that the city has only one Premiership football team. Andrew Tucker of Gerald Eve, which conducted the research on upcoming supply, comments: “Anything over £150,000 is where there is going to be problems. What is the professional population compared with Leeds or Edinburgh? “I suspect we are at the bottom of that list. And how many of those are city-centre dwellers and how many live outside?” Taylor Woodrow’s Baltic Quay sold well, for example, but its Renoir block, with apartments in the £165,000-£260,000 range, still has 26 out of 40 flats remaining. Edward Seymour, head of Chesterton’s recently-opened North East residential office, believes that premium stock in prime positions will always be successful, but states that investor numbers are key. At Curzon Place in Gateshead, the investor to owner-occupier split was about 50/50. The Citygate scheme in Bath Lane, Newcastle, was more heavily weighted toward investors. About 55% of buyers there were looking to rent or sell on units rather than occupy. Seymour states: “Over-investment into the city centre will create a problem. Investors will immediately want their returns, but if the market is flooded those returns will not be there.” He is, however, optimistic that supply and demand will find a natural equilibrium, echoing Miller’s belief that owner-occupiers will fuel future demand. Such an outcome is, however, dependant on demographics. Buy-to-let investors have to be able to secure around £800 per month in rent, normally from either a working couple or an affluent professional. If such rents cannot be achieved, will investors seek to sell at the top of the market and create a glut of expensive properties? Given the rising prices and increased availability, yields are likely to soften. But Bellway Homes is confident that returns will be viable for properties in the £80,000-£140,000 bracket. Units priced above this level, however, will struggle. But some agents are not convinced there will be a glut, at least in the short to medium term. They believe the factors that led to a strengthening market will ensure a soft landing rather than a crash. They see growth gradually declining rather than reversing, and point to low interest rates and low inflation to support their prognosis. Knight Frank’s Nicola Osborne, for example, believes it is premature to talk of oversupply when the market has been undersupplied for so long. “I don’t think there will be a supply-demand imbalance over the next 12 to 18 months,” she says. “We do not have the product in the city centre at the moment for there to be a glut. Most have sold well in advance, and it is not as if all this property is coming onto the market in the next three months.” Waiting lists Equally, there are no signs of demand abating. Chesterton says it recently sold 74 flats at one scheme in two hours. Knight Frank talks about “a lot of people on waiting-lists”. In addition, the purchaser profile is changing, reflecting increased interest in city-centre living. As well as young professionals, there are older couples and so called “empty-nesters” – those couples with grown-up children who have left home. This demographic change might prove extremely important in sustaining the growth of the city-centre housing market. Investor profiles are also altering. There are now far more small investors buying single properties for income, as well as London-based and Irish investors seeking fresh pastures. The rapid growth of the residential market has caused people in Newcastle to view property as a speculative commodity rather than a long-term investment. The general consensus is that the residential market in central Newcastle is performing well and will continue to do so in the short- to medium-term. Despite rumours of some supply dropping in value, there is no substantive evidence, and there are certainly no examples of incentives being offered to sweeten buyers. Bellway Homes’ Miller says: “The next 12 to 18 months will see the top of the market. After that, price rises will follow the rate of inflation. But we will see another 10% to 15% growth in the next 18 months.” More importantly for Miller, he expects that owner-occupiers will become the more dominant force in purchasing over this period as yields soften and the volume of rental stock rises. It is also likely that the fringe areas of the city centre will open up, providing slightly cheaper products for the increased demand. Under construction or proposed residential development in Newcastle city centre (more than 100 units) The Calder Industrial Materials site could become a 800-unit residential scheme if Newcastle council gives the go-ahead Scheme No of units Developer Comments Cattle Market, Railway Street/ Scotswood Road 135 McAleer & Rushe Part of a 325,000 sq ft mixed-use scheme, including office, residential, leisure & a Jurys Inn Hotel. The development is expected to be completed spring 2003 Forth Street/Hanover Street east 250 TBC Awaiting details from Newcastle city council planning. Proposal for large site to the north/north east of the bonded warehouse Forth Goods Yard 100 TBC Awaiting details from Newcastle city council planning Bewick Court, John Dobson Street 133 plus three offices n/a Conversion and refurbishment of a 1970s residential tower block. Will comprise 76 two-bed and 57 studio apartments Swan House, Pilgrim Street Further 165 Crown Dilmun Conversion of 200,000 sq ft of vacant office space to provide 165 one- and two-bed flats. Proposals exist for a leisure scheme within the development St Anne’s Yard, Tarset Street/ Cut Bank off City Road, Quayside 140 Ryder/Metier £15m residential development. Historic features of the site will be retained Properties Off Pottery Lane/ West of Redheugh Bridge, Quayside 800 TBC Possible development of the Calder Industrial Materials Site, to the south of Newcastle Arena. Awaiting details from Newcastle city council planning department West of St James Boulevard 132 TBC Land to the west of St James’s Boulevard, bound by Westmorland and Westgate Road, and Blandford Square to the front of the Science Museum Ouseburn 145 TBC Proposed development of a 30-storey block of flats to provide 145 flats overlooking Quayside. Planning permission is being sought Maling Street, Ouseburn 117 TBC Former Ice Factory. Awaiting details from Newcastle city council planning St Lawrence Road, Ouseburn 107 Bissett Kenning & Newis Eight blocks with car park. Ten penthouses, 29 one- bed, 60 two-bed, eight three-bed maisonnettes. Development site for sale. Planning permission has been granted Land to the west of Spillers Mill 282 TBC River frontage. Awaiting details from Newcastle city council planning Baltic Quay, Gateshead 237 Bryant Homes New residential development, proposed for the Gateshead Quays area. Under construction Source: Gerald Eve