Across global cities, the tide has turned against building luxury homes for the super-rich. In recent years, developers have put up plush towers in prime areas of cities such as London with the aim of attracting the world’s footloose elite, and charging multi-million prices in the process.
Many have proved unwise investments. Apartment prices have been slashed in some cases as a glut of high-end product has met dwindling demand from the few who can afford to live in them. Chinese capital controls, the falling price of oil and concerns about political factors in Europe have made the world’s wealthy less keen on putting their capital into posh penthouses.
Meanwhile, several European countries face acute shortages of homes within the financial grasp of their local populations. In the UK, London mayor Sadiq Khan recently said the capital needs 66,000 new homes per year, up from 29,000, and that 65 percent need to be affordable.
Speaking to real estate bankers and alternative lenders active in financing the residential sector, many acknowledge that luxury schemes are off the radar, while emphasising the importance of ‘affordable’ stock.
But if ever a term had a subjective definition in real estate parlance, that is one. In the London market, for instance, lenders say they are looking at a price point of £1,000 (€1,123) per square foot and below. To the majority, that is far from affordable. But lenders argue they will only finance schemes accessible to people who live and work in the city, albeit the more affluent.
The fact is that real estate bankers and debt fund managers do not tend to be in the business of financing the kind of large-scale product that solves housing crises – typically the preserve of house-builders and social housing providers. Lenders have return targets to meet and require schemes of an adequate market value to secure their loans. However, they can play a role in addressing the mismatch between schemes that do nothing to address local demand and schemes that do.
Some lenders argue that they would like to finance schemes priced nearer to £500 per square foot, or even £400 per square foot, but that quality schemes at transport nodes at that price point are not widely developed. Developers in key cities in the UK and beyond are funnelling their activity into the build-to-rent sector as market pricing remains out of reach for many locals. Measures unveiled this week in the UK chancellor’s budget to help first-time buyers, have been criticised as likely to backfire and further push up prices.
Housing markets across Europe vary wildly in the type of stock people traditionally favour, the method by which housing is financed and the challenges facing the provision of stock. But there are pockets of opportunity across several markets – whether the burgeoning appetite for apartments in Dublin’s docklands, or the German cities facing rising populations and a lack of new-build projects. Regional UK cities such as Manchester and Birmingham are also attracting development.
Finding residential financing opportunities that tick the right boxes for lenders will remain a challenge. What is clear, however, is that backing the types of schemes Europe’s cities need makes more financial sense than bankrolling projects aimed at only the very wealthy.
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