London. The region where sellers are now most likely to sell at a loss!
Jan 13
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Anyone in the industry in London who deals with a lot of apartments will find that the research out from Hamptons will come as no surprise, as 90 percent of the properties sold at a loss were flats. However, to read it in black and white is still quite staggering for anyone who, like me, spent a lot of their career seeing people make fortunes with the mantra of “house prices in London double every ten years” often repeated, (which was true at the time. Well sort of). The thought of this being the situation was almost unthinkable back in the early 2000s.
A few thoughts and other data I’d love to know -
I would love to know the inflation-adjusted figure, i.e. the amount of sellers who are making a loss against the amount paid when inflation over the period is taken into account. Given the last decade has been an inflationary one, I think this figure would be even more impactful and eye-opening. I’m sure many more sellers are making a loss in real terms when inflation is factored in.
You would assume that any owner making a loss who is also an owner-occupier has saved a significant sum in rent over the period, versus their mortgage payments. If on capital repayment, they would have reduced their loan whilst making payments that were less than what the rent would be for similar properties, so could have made an overall net saving rather than a loss. Even after the cost of acquisition and cost of sale were taken into account.
The percentage of increase in service charges for flats selling at a loss over the period of their purchase to sale? As I’ve mentioned a number of times in my blogs, the huge increases in service charges are killing the values of leasehold flats in a huge number of developments across London. High service charges are turning leases into hefty liabilities rather than assets. I’d bet a huge number sold at a loss have high service charges as part of the problem.
However, the fact that 90 percent of the properties sold at a loss were flats also shows that houses have largely avoided losses. What does this tell us? Well, what do we know about houses in London? We know that they are mostly older stock, so most would have been purchased on the resale market (where values need to be rooted in reality). We know that developers don’t really build many in London, so the supply doesn’t ever really increase a great deal. We also know that family housing is in huge demand. We also know that families are less flexible in both location and needs, so will pay what it takes to be in the area they want/need.
Almost the opposite is true for apartments/flats. We know they are the favourite product of developers who stack them high and sell en masse. We know that their supply can increase quickly in areas where buildings often contain 200 to 400 brand new apartments. We know that there will be a limit on demand at some level and that occupiers can be more flexible on location. We know that developers’ values are somewhat more subjective and that the premium paid on new build apartments on the basis of “regeneration and its effect on future value” can be huge. If these regeneration plays, which often take decades to kick in, don’t bite (see Elephant and Castle), your price paid can look rather inflated.
The other fact that I find informative is that the highest loss-making borough in the capital is Tower Hamlets. A borough I know extremely well, having dealt with it for most of my career and run offices there. This fact comes as no surprise to me either. Led by Canary Wharf and the Isle of Dogs, the area is packed with high-rise luxury developments, often boasting huge numbers of apartments and sold at high values compared to the local resale stock, often to overseas investors. Having run offices there in the mid-2000s, I can say that the Canary Wharf estate itself has come a long way since then. It is now a destination in its own right with great options for relaxing, entertainment and lifestyle outside of the office, the things it was always criticised for lacking. However, outside of the Canary Wharf estate, a lot of the buildings that were developed in the early 2000s are now beginning to look shabby and the take-up of commercial units to build a real community feel hasn’t benefited from the investment that the backers of the Canary Wharf estate have been able to generate. This has meant that the area outside of the Canary Wharf estate can still feel a bit soulless and unloved.
As far as London is concerned, to me this has felt like a lost decade for the property market as a whole. A decade where more property and progress in property was badly needed has been lost. The belief has come out of the market for a lot of residential property investors for a number of reasons, not just a lack of capital growth. In addition to this in most cases, a mix of red tape, planning delays and excessive build costs have left only the biggest of the big being able to have a crack at any significant development in the capital.
Looking ahead, my hope is that we don't have another lost decade in front of us. When I look at my own residential portfolio in London, I see values that are barely above where they were back in 2014. My hope is that we will see some good days return and get back to a run of yearly (sensible) increases in property values and perhaps with the benefit of hindsight, we can target a more appropriate delivery of housing both in type and in price.
