London new build schemes charge 20% premium
Inner London is being impacted by the proliferation of high value new build schemes which are sold at a "significant premium to true market value".
Research from LCP found that buyers are paying a significant premium for new units, largely due to the significant marketing campaigns which surround new developments.
In Prime Central London, this can hit 20%, with the average square foot price for a new build standing at £1,701 compared with £1,418 for an older property.
The remaining nine most central boroughs, encompassing the new build heartlands of Tower Hamlets and the Battersea to Nine Elms stretch, have achieved an even greater new build premium amounting to 25%, where the average price stands at £659,459 compared with £525,307 for older property.
However in a market which is heavily saturated with new developments, LCP says there is a risk to buyers of a substantial oversupply of such units, both to buy and to rent, suppressing yields and prices.
LCP's research demonstrates the significant suppression in price growth, resulting from the initial sale premium. Price growth lags 26% behind the rest of the market, increasing just 7.3% a year since 2003, compared with the PCL average of 9.3% p.a.
LCP says this will also cause major concerns for London’s first time buyers, being assisted into the market through the new London Help to Buy scheme.
It believes the marked lag in price growth could result in a bottleneck of first time buyers, unable to trade up, in the coming years.
Naomi Heaton, CEO of LCP, said that "not only could this have detrimental knock-on effects for normal churn in the property market but it may also impact the Exchequer’s balance sheet, as Government struggle to recoup their 40% loan on sale".
“Investors are paying a heavy premium for newness which, by implication, has built in 'obsolescence'. At re-sale, units in big schemes which are essentially 'commodities' can only compete on price. They are also unlikely to appeal to the international buyer, the driver of the 'new build' market, once they are second hand. These factors make them far less resilient to market pressures such as a global financial crisis. Shrewd investors should consider buying at the stage in a development’s life-cycle when the premium has been eroded and a downward overcorrection in prices often takes place. They should also consider older property in London’s classic buildings which see much more stable price appreciation. These might need refurbishment, but undertaking this offers the benefit of an immediate uplift in value, rather than paying a premium to a developer.
“In LCP’s opinion, the new build effect in Inner London is likely to take a heavy toll on areas like Battersea to Nine Elms where there is extensive oversupply of new property. With over 22,000 units being built there, a significant softening of prices is likely in the foreseeable future, until the new build premium is eroded and prices come back in line with market averages. Tower Hamlets, home to Canary Wharf, already sets a precedent. With the enormous number of new builds developed there over the last decade, prices are up just 37% since 2008, compared to PCL which has seen price growth of 68%.”