Liquidity ebbs for prime

Debt is harder to find in the softer central London residential market, reports Jane Roberts.

Financing new build for sale in Central London is becoming a much more challenging marketplace.

Two reasons stand out: some banks are feeling quite full of London residential as an asset class, and, as Andrew Wheldon, CBRE senior director in residential capital markets, says: “There’s caution around the market generally. Through 2015 transaction levels fell and prices softened accordingly.”

Then there’s the headlines, some of them lurid. They focus on a rise in supply – there are 50,000 homes planned or under construction in prime and prime fringe areas of the capital – coinciding with a fall in demand. Overseas buyers have been knocked back by falling currencies and the depressed oil price, while the stamp duty tax hike for the £1 million-plus bracket is adding to the central London residential market’s woes.

In truth, the market has been softening for at least 12-18 months, but the evidence is only starting to come through. Last summer, Jones Lang Lasalle was predicting year-on-year central London residential price growth of circa 6 percent; this year it is forecasting that prices for new-build flats in central London will fall 3 percent in 2016 and not rise until 2018.

Last month, Savills said central London residential land values had edged down for the first time since 2011 in its half-yearly Central London Land Index. “Falls in house prices in high value areas and softening of sales rates in central London have put pressure on land values,” said the agent’s research analyst Lucy Greenwood.

Yet the falls are small so far – Savills’ index average for the six months from September 2015 – March 2016 is a dip of 1.5 percent – and they come after several years of rampant price growth. Randeesh Sandhu, chief executive of alternative lender Urban Exposure which specialises in residential development finance, points out that the market was due a correction because sales of prime flats had been “abnormally high. Now they are at more realistic levels and it’s more about the number of transactions than price; some schemes are having to be more realistic about pricing. But they are selling, and above appraisals”.

In terms of debt availability, it has led to a two-tier market. Borrowers and lenders say liquidity is drying up for London residential developments for sale aimed at buyers paying over £1,000 per square foot – the market dependent on overseas buyers. One borrower said: “The financing market has liquidity at £1,000 per sq ft and below; above that it has been ebbing for at least a year.”

Cheaper flats favoured

Wheldon says lenders are more focused on the sizes of flats in proposed developments. “They are looking at schemes with a higher percentage of studio and one and two-beds with sensible capital values.” They can be less keen on the more expensive three-bedroom homes that can be harder to market in central London towers. “After that, it comes down to the usual things: the developer’s track record, the location and the concentration of new build in the area,” he adds.

“There’s probably more liquidity for smaller deals, less for higher-value deals that need large clubs. Those are taking much longer as a function of the lack of capital available,” says Sandhu. The cost has also gone up, with financing spreads now 50 bps higher for senior. “A year ago basis points margins for the best schemes started with a 2. Now it’s the low 300 bps if not more,” says one borrower.

Clubbing: Barclays is the arranging bank seeking over £200m for Damac Properties’ AYKON Nine Elms in Battersea, nicknamed the ‘Versace Tower’
Barclays is arranging over £200m for Damac Properties’ AYKON
Nine Elms in Battersea, nicknamed the ‘Versace Tower’

The UK clearers are pickier: “We’re avoiding newer players to market who are less experienced or who don’t have a very large balance sheet behind them,” says one.

Barclays is one of the few banks which had lent consistently through the downturn and into the upturn on central London residential, to clients such as Galliard, London Square and Mount Anvil. It has got to the point where it is replenishing rather than growing its book and it has a lot of central London residential. But it is still writing prime central London loans, a £36 million facility for Native Land in May being an example, and it is acting as the arranging bank for Damac Properties’ AYKON Nine Elms luxury tower in Battersea.

Lloyds has exposure to a string of prime residential schemes under construction, priced at £2,500 per sq ft and up, which it says are selling well. They include the Canary Wharf Group’s Shell Centre redevelopment on the South Bank, Ronson Capital Partners’ Riverwalk House, also on the river, and Chiltern Street in Marylebone. More recently it was an underbidder on the £400 million financing of Almacantar’s Marble Arch Place, which will include a residential tower and was financed with alternative lender The Children’s Investment Fund.

“We absolutely have an appetite to do business”, says the bank’s head of developers Graeme Alfille-Cook. “But we will be disciplined.”