Far East infusion helps revive ailing London resi schemes

China’s Greenland joins string of Asian players backing residential projects, writes Doug Morrison

There were no half measures or tentative, joint venture hand-holding earlier this year when Shanghai-based Greenland Group made its entry to the UK property market with the acquisition of the Ram Brewery development site in south-west London. At the January signing ceremony, Greenland chairman and president Zhang Yuliang said the all-in cost of buying and developing the mixed-use site would be £600m and confirmed that Greenland plans to invest another £600m in an apartment tower in Canary Wharf. This makes the Chinese state-owned firm all of a sudden  one of London’s biggest residential players.

A £1.2bn downpayment on the capital’s residential market seems a massive gamble on a city where relentless house price growth has led to fears of a pricing bubble. But Greenland is no stranger to high-profile deals. In October it paid about $5bn for 70% of mixed-used New York regeneration scheme Atlantic Yards – reportedly the largest Chinese investment in US property. Ram Brewery site vendors Ares Management and Delancey inherited the site in 2011  when they took over property firm Minerva, which had spent years working up plans for a residential-led redevelopment of the site. Ares Management and Delancey secured consent for a revised scheme, including 669 homes, last July.

Overseas boost for languishing schemes

Ram Brewery is just the latest in a series of residential-led projects conceived in the pre-2007 boom, before languishing on the drawing board during the credit crunch and finally resurfacing on the back of foreign capital and a rising housing market. Research by Real Estate Capital shows that London has 149 housing projects of 500 homes or more subject to planning applications, with outline consent or under construction. Of those, 12 are backed wholly or partly by foreign investors, and they are invariably the biggest in terms of numbers of homes and capital value (see table).

Battersea Power Station, with its infusion of Malaysian sovereign wealth fund and institutional capital in 2012, is arguably the highest profile project in London today. But Chinese investment has also gathered pace, including Sun Hung Kai buying an Earls Court regeneration scheme site for £110.9m in 2011 and Knight Dragon paying £230m for Quintain’s stake in the redevelopment of Greenwich Peninsula last year.

Frasers Property’s Riverside Quarter is nearing completion, but the Singapore group has been active in the UK for over 15 years. Other old stager Hutchison Whampoa’s long planning struggle with Convoys Wharf in Deptford may yet pay dividends. When the Hong Kong group bought this riverside site in 2005, the reported development value was £168m; now it is estimated at £1bn.

Real Capital Analytics, which distinguishes between Hong Kong and mainland Chinese investors, says the latter are behind a recent surge of overseas capital into London, in the form of state-backed investors, pension funds and insurers with new freedom to invest overseas, or private firms and individual investors looking to diversify internationally. Joe Kelly, RCA’s director of EMEA market analysis, points to a huge build-up of capital in China that needs to be deployed. Bonds used to be the favoured diversification but with “slight worries around US Treasuries” mirroring concerns over the US economy, property is deemed to be safer. Looking at where global flows are ” 500 homes in the planning system or under construction shows a further 153 live projects in London, including 21 backed by overseas investors.

Foreign capital backs the big projects

This category covers some of London’s most notable projects, such as the 420-home Lots Road Power Station redevelopment in Chelsea by Hutchison Whampoa, and Qatari Diar’s redevelopment of Chelsea Barracks into 448 homes. More recently, Green Property has sold One Nine Elms to another mainland Chinese entrant, Dalian Wanda Group, which will take on a £700m development including 436 homes, a hotel and offices in two towers.

The early phases of many developments of this scale are financed by off-plan sales  to individual overseas investors, which has been an increasingly important feature of the post-financial crisis market. They, too, have been partly lured by the weak pound. Research by Molior published by the British Property Federation in February reveals that overseas buyers accounted for 15% of new homes bought in London during 2013. That average appears low, but Molior says the proportion of overseas buyers in any development depends greatly on its location – and the figure is higher than 80% in prime central London schemes.

Liam Bailey, Knight Frank’s global head of residential research, sees a link between foreign buyers of properties and the injection of major development capital from overseas. “You’ve got this wealth coming from, say, south-east Asia into the [London] market,” he says. “A number of developers from those markets are also looking to get into London to improve their brand image at home, and one of the best ways to do that is to get the best site in London or New York. It helps them announce that they have arrived as a global development brand and adds to the kudos of their domestic schemes.”

RCA says another emerging trend is a shift into the residential sector and development generally because of a rapidly diminishing pool of prime commercial investments. “We saw improvements [in investment] across all sectors in 2013,” says Kelly. “The lowest volume was in development sites, but it picked up quite rapidly in Q4, indicating that people are moving up the risk curve. It is still concentrated on very core markets –  London, the big German cities and Paris – but that’s where you’d first expect supply, given the lack of new developments and the demand in those locations.”

This long-term imbalance between supply and demand in London housing supports the case for new entrants to development. CBRE research reveals that 300,000 homes are in the capital’s planning pipeline. Yet London’s population is set to jump by 14% – over 1 million people – in the next decade. During the past 20 years, annual supply has averaged 17,350 homes, well below the Mayor of London’s recently disclosed 42,000 target as part of his draft housing strategy for the capital. According to CBRE, 52,000 new homes will need to be built in London each year – 10,000 above the revised target.

CBRE says Berkeley Homes, Barratt Homes and Bellway Homes have accounted for more than 16,000 new-build starts since 2010 – a third of all private housing starts across the capital. The next seven largest housebuilders contribute between 20% and 30% of open-market housing starts.

Volume housebuilders heavily exposed

With such heavy London exposure, it seems fanciful to expect UK volume housebuilders, whose shareholders are arguably more sensitive to the danger of London’s perceived housing bubble bursting, to take up the slack. However, CBRE notes that London’s key development growth areas, including Earls Court, Stratford, Elephant and Castle, and Vauxhall Nine Elms and Battersea, have already attracted large-scale international investment. CBRE says Malaysian, Chinese, Singaporean and Middle Eastern companies have consent for 33,000 homes in London.

CBRE’s figures bear out RCA research made available to Real Estate Capital, which shows that overseas groups invested £985.5m in London development in 2013, compared with £844.34bn from domestic players. Overseas development capital here has exceeded domestic investment since the end of 2010 (see bar chart). Kelly says: “It is not all cross-border, but some of the bigger developments have gone to international investors, which are experienced international developers in their own right. It is not just UK opportunities; they look globally, in the US and in Europe for development opportunities and they have the capital to do it.”

Greenland Group falls into that bracket. At the time of the Ram Brewery deal, for example, Greenland declared that it wanted to invest between $5bn and $8bn in new projects overseas this year, targeting France, Canada and Singapore as well as London. Bailey argues that London’s attraction to overseas investors no longer simply revolves around small but expensive opportunities in Belgravia and Knightsbridge. “It is a complex process to move an operation into the UK from another country,” he says. “If you’re going to do it you’re looking for the ability to do it on a big scale, and a lot of the big regeneration schemes put on hold in 2008-09 are only now coming round again.”

Whether or not the foreign capital will extend in any great quantity to regional housing development remains to be seen. Bailey adds: “Some schemes are starting to move in Birmingham and other cities, but  it’s from a low base. For overseas players, London is still the focus, without a doubt.”