Commercial to residential

Follow the money. The old adage of the Watergate scandal has never been truer than with London property.  A look at what the publically quoted property companies in the commercial space are up to is interesting.  All over London, where they can, they are pulling down offices and building flats to replace them in areas that would challenge the description of residential. Why? Because they can get returns from these developments that leave in their wake anything that commercial use could give them. This valuation gap is changing London.

Take Land Securities, for instance. They are planning almost six hundred units in Victoria alone over the next decade. One development already underway is Kingsgate House, slap next door to Westminster Town Hall on Victoria Street – a busy, and frankly pretty dreary, high street with hardly a restaurant in reach other than the standard offerings of Pret a Manger, Macdonald’s and Costa. The Residential Sales director is quoted as follows. “We will probably go over to Asia next spring but essentially we are looking to do deals in the UK. I guess we can sell 20% of homes overseas. The bulk of sales will be UK based. We have a really solid, mid-market, mid-prime UK-friendly product with pricing between £1700 - £1800 per square foot for standard flats.’ In the same magazine the Chief Executive of the Battersea Power Station Development Company is quoted as saying ‘ We are prioritising UK buyers’.

Almost every phrase here is interesting.

The first is the ‘new normal’ of pricing. At £1800 per square foot a two/three bedroom flat is going to cost around £1.8m. If you had said to anyone only five years ago that a two bedroom flat on Eaton Square, let alone Victoria St would be selling for a tad under £2m you would have been asked to stub out whatever you had been smoking. To put this back into the real world of more normal interest rates of say 8% and a deposit of 30% this would imply a deposit of over half a million pounds and an annual interest bill of just below £100,000 per annum. Mid-market? Only in comparison to prices in the heart of, say, Belgravia. It is also here that the benefits of local knowledge become apparent. Belgravia and Victoria are both in SW1 and the latter looks about as central as it is possible to be, allowing a subtle conflating of values on the sales brochure. There is a difference - and quite a big one.

Then there is the insistence by both executives that they are aiming at a domestic market.  This seems more than coincidence and has the ring of PR companies hard at work. It is even more odd when everyone knows that the route to riches for developments like this has been via road-shows in the hotels of Singapore, Hong Kong and Shanghai where buyers only look at a postcode and the computer generated story books. If Asia is, after all, where the money is, why the sudden yearning for the empty wallets of the UK?

The answer might be connected with the recent assault by the Chancellor on properties held in company names. Even the most bullish of treasury commentators see this attack as more of a political move than a serious revenue-raising exercise – and the Chancellor is nothing if not a political operator. What he is reacting to is the sort of talk that used to be heard in the towns of the North-West when the white working classes complained that foreigners were taking their jobs. The new middle class moan in the South-East is that the foreigners are taking their houses – or rather their right, as they see it, to live within bicycling distance of Harrods. This has now extended to wondering how their children are ever going to be able afford anything in the capital without them having to sell their house to give them a deposit. This is a serious subject to the voters who are bending the ears of politicians of all stripes when they leave the Westminster bubble.

The internationalization of London was seen, until quite recently, as a ‘good thing’. Bankers and artists settled in London, paid their taxes and ate in the restaurants. Money washed round the system. But the credit crunch changed things. Far from hammering property prices, it had the opposite effect and London real-estate became the equivalent of gold bullion – a store of value in an uncertain world. Few of the new buyers from China and the embattled Eurozone live in what they bought and many of the buildings they purchased in en masse have, as a result, about as much charm as a bullion vault. A wander around Paddington Basin or some of the developments that have sprung up along the river is not an uplifting experience:  café life has failed to ignite and most of the lights are off for most of the year. Is this good for London in the long term?

It is important to remember that, unlike the unlamented sixties’ office blocks that they are replacing, these buildings will be with us forever. The Leasehold Reform Act has meant that there will be no landlord with the motivation to refurbish or rebuild in a hundred years’ time. Multiple ownership, particularly when much of it is non-resident, is not the friend of good management and what gleams now will probably get distinctly shabby with the passage of time.

With this as a background, the ‘UK property for UK buyers’ charm offensive from the developers makes sense. Given the economic realities however, a pinch – or even a shovelful - of salt might be in order. They may wave these mega-blocks over the domestic market with a press fanfare, but the serious money will be made where it always has been, in Asia. They have tens – hundreds - of thousands of units to sell over the next few years and these are unlikely to be ‘homes’ for Londoners.

A domestic political backlash is their biggest threat. This has happened already in Hong Kong where a wall of mainland money has driven prices out of reach of locals and the government has stepped in to introduce a 15% tax on non-resident buyers. If this can happen in the temple of laissez faire capitalism, it can certainly happen in London.

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