New-build property prices in London are in line for a boost, according to new research, as regeneration projects and new transport links make previously unloved areas more attractive to investors.
In its report on London Hotspots: Residential development opportunity areas, agent Knight Frank claims that certain areas of the capital undergoing major infrastructure improvements will see new-build property prices rise by more than 30 per cent between now and 2016.
Highest price growth is predicted for Nine Elms, in southwest London, where agents suggest residential prices could rise by as much as 140 per cent, to £1,800 per square foot. Their projections are based on the opening of the new US embassy in 2017 – which is expected to transform the area’s identity – and the extension of the London Underground’s Northern Line.
Other areas attracting attention include the City of London, where new developments are expected to achieve prices of £2,000 per square foot – and an increase of 118 per cent. This part of the capital has seen an influx of wealthy residents in the past five years, with demand likely to be sustained by the development of a new station at nearby Whitechapel, providing better transport links.
Infrastructure improvements over the next few years are now the key to growth, says Liam Bailey, head of residential research at Knight Frank. He cites Crossrail – the line serving the new Whitechapel station – as potentially having most impact when it opens in 2018.
Similar “hot spots” include Hammersmith, in west London, Marylebone and Fitzrovia near Oxford Street and Earl’s Court and White City, in west London
“There’s no doubt that a growing number of people are looking to protect their wealth in stable property assets such as new-build property, which provide a long-term return,” says Nigel Lewis, property analyst at PrimeLocation.com.
“There’s also the added dimension of wealthy overseas buyers and institutions who find investment in London particularly attractive, but we’re also hearing anecdotally about the return of the British buyer to the London market.”
But returns from the new-build market in London are still a far cry from the boom years when developers offloaded projects to investors willing to bulk buy “off plan” – sometimes years before the first brick was laid – with the aim of selling on before the end of the build.
Since then, investors have been wary of returning to the new-build sector. Sales of new-build investment properties have been in decline since 2007 when the property bubble burst – and it was new-build apartment prices that fell the furthest and fastest. With the withdrawal of mortgage finance by risk-averse lenders, empty developments were left to languish as new-build fell out of favour.
It remains a risky market to invest in, say experts. Many lenders still down-value newly built properties far more than they do established homes at the application stage – and a low valuation can mean investors might not qualify for a big enough mortgage to complete the purchase. This is because lenders are worried about the resale value of these properties if buyers default on the loans early on.
“The nature of new-build means there will be a number of similar properties coming on to the market at the same time,” says Henry Pryor, UK housing expert. “This means that – as many people who bought in 2007 are discovering – if the market falls away before the final phase of development, the last tranche of flats could be sold for a lot less than the initial buyers paid for theirs.”
He warns that people should not wade into buying new-build property expecting it to be a one-way bet. “This market works in a very different to traditional property,” he says.
But the fundamentals have improved, agents insist, as demand is returning while supply is limited. ”Housebuilding in London has picked up sharply since the financial crisis, but there is still a huge backlog of development projects that have yet to start,” says Bailey. “Even if these projects get off the ground, there will still be a significant shortfall in housing.”
Across the capital, planning has been granted for 214,825 units, but Knight Frank estimates that 374,111 households will have been created or moved into the capital by 2020. Even if there is a sharp pick-up in planning consents and building, agents argue that developers will struggle to eradicate the current implied 42 per cent shortfall in housing.
Steve Lees, director at SmartNewHomes, says developers are now working hard to attract buyers back to this market. “Housebuilders are continuing to price competitively to incentivise sales, which in the current context of strong rental growth is delivering some excellent yields for investors.”
Lewis, of PrimeLocation.com, says the yields on new-build are already looking attractive in a low-interest rate environment.
“London is a particularly good choice for the buy-to-let investor because prices in some parts of the capital have been down a bit or held steady over the past couple of years – which makes them far more attractive to investors who want to benefit from yields in excess of the national average of 4.75 per cent.”
Stuart Law, chief executive of Assetz, agrees. “An increasing number of new buy to let investors are registering with us every month with the vast majority UK based and looking for new build property because they offer a safe, hands-off investment.”