Around the world, buyers are turning away from luxury properties. Here’s why
In many parts of the world, such as London, construction of luxury residential properties continues to be out of step with demand, while in New York, as much as 40 per cent of apartments on Billionaire’s Row remain unsold.
Viewed from Bangalore, the purchase of a newly built three-bedroom apartment in London for more than £1.4m (S$2.4m) seemed like a safe investment bet.
The top-floor three-bedroom home under construction in Keybridge House south of the Thames boasted views of the City of London and the Shard skyscraper. As Shonu Bhandari considered the purchase two years ago, agents told him he could expect the value to rise 15 per cent before the property had even been finished. The Indian entrepreneur, who runs a medical products company, happily signed up to buy.
But his purchase soured quickly. When Bhandari approached a mortgage lender, it valued the property not at 15 per cent more than he had agreed to pay – but at 20 per cent less. With completion of the building looming, he signed over the property to a new buyer in March this year for £1.2m, losing more than £200,000 of his deposit.
“It was not as good as it looked on paper,” he said. “I would buy again in London but would I buy off-plan? Not any more.”
Bhandari’s experience has been repeated around the world. The property he was set to buy forms part of a global wave of development of luxury urban apartments, fuelled by developers’ expectation they could sell thousands of homes as investments to the international wealthy.
At the height of the boom in 2014 and 2015, buyers from Shanghai to Kuala Lumpur and Mumbai bought unbuilt homes overseas from brochures, in buildings that promised 24-hour concierges, gyms, pools – and almost immediate financial returns. One new-build brochure from the estate agent Savills in 2016 said price growth in prime central London was expected to average 21.5 per cent by the end of 2020. Prices have so far fallen 10.4 per cent since that date, according to LonRes, a data provider.
The homes were built in part to cater for a boom in Asian wealth, often coupled with a desire to store that wealth in a stable location abroad.
“Global capital entering local real estate markets is not particularly new, but what was new was the intensity with which it entered places like Vancouver, New York, London, Melbourne and Sydney,” said Andy Yan, a planner and academic in Vancouver.
Developers targeted both mortgaged investors such as Bhandari and those wealthy enough to pay in cash. The influx of investor money helped to decouple already stretched urban house prices from local incomes.
But despite the expansion of global wealth, the surge in demand for luxury apartments did not last. Developers’ over-exuberance and government crackdowns combined to end the selling frenzy and leave developers, lenders and property investors battling to absorb the fallout.
“I can’t remember the last time I sold a new-build property at a profit,” said Charles Jordan, an agent at MyLondonHome who resold Bhandari’s apartment. Jordan recently helped resell another home in a waterfront tower that was bought for £2.8m and sold for £2.05m ahead of completion – so an overseas buyer who had hoped to “flip” for a profit instead lost £750,000.
“Global capital entering local real estate markets is not particularly new, but what was new was the intensity with which it entered places like Vancouver, New York, London, Melbourne and Sydney.” – Andy Yan
Arriving at Vancouver’s international airport, visitors must walk past advertisements for gleaming new-build condominiums, with text in both English and Chinese.
The sales push is testament to a boom that has transformed Vancouver, thanks to an influx of overseas capital into property. About C$75bn (S$77.9bn) of property is owned by overseas residents; in parts of the city one in four new-build apartments is owned by a non-resident, according to Yan, who directs the city programme at Simon Fraser University. House prices in greater Vancouver rose about 80 per cent in the five years to May 2018.
A report this year commissioned by the regional government, which took power in 2017 pledging to combat the housing affordability crisis, described how “a fever developed, akin to a gold rush, in which foreign buyers rushed to buy homes, willing to pay over market price for property in order to be in on the rush and avoid what many thought was inevitable – government intervention. Local speculators and prospective buyers, worried about being priced out of the market, further fuelled demand.”
Governments did indeed intervene: The Chinese government introduced curbs on capital flows overseas, and the regional administration in British Columbia chose to attack through tax. In 2016, it introduced an additional tax on overseas buyers amounting to 15 per cent of the value of the property, which was increased to 20 per cent last year. This helped send the market into reverse. New-build homes are exempt from this charge but have been targeted with other measures including a registry of home “flippers” aiming to combat tax evasion. House sales in Vancouver this year have dropped to their lowest levels in decades.
Under intense political pressure over housing, governments around the world have acted similarly. The UK government overhauled stamp duty in 2014, sharply increasing the tax for homes costing more than £1.125m; two years later it added a surcharge for second home and investor-buyers. Australia’s New South Wales doubled its stamp duty surcharge for overseas buyers to eight per cent in 2017. New Zealand last year banned most property purchases by non-resident overseas buyers.
The US also took measures: Donald Trump’s tax plan this year capped deductions of state and local taxes – including property tax – that households could make from their federal tax bill at US$10,000 (S$13,556). Mortgage interest tax deductions also faced a new limit. This added to the costs of owning expensive properties in high-tax states such as New York.
Measures to combat money laundering also sent a chill through some wealthy would-be buyers. Canada and the UK are bringing in registers of those with “significant control” of companies, including those used to own property. Measures such as this have worried “people who are concerned about reputational risk – who are afraid that noise might surround their family, their assets”, said one senior London banker.
Such moves sent property markets reeling. Steven Herd, founder of MyLondonHome, said some clients he helped to resell homes were far from super-rich and ended up losing their family savings. “Sometimes the deposit money came from a whole family clubbing together to invest, because it’s what everyone was doing.”
“I can’t remember the last time I sold a new-build property at a profit.” – Charles Jordan
Many buildings planned when the gold rush was at its height are only now being completed. Some, such as New York’s 472m-high Central Park Tower currently under construction, have launched sales programme in the past year. Yet on Billionaire’s Row, the new crop of residential skyscrapers close to Central Park that will include the new tower, about 40 per cent of apartments are unsold, according to Jonathan Miller, a property consultant and analyst. Inner London has about 1,500 completed new homes that have not been sold, according to Molior, a research firm.
Lenders are issuing inventory loans to developers who have been unable to repay construction loans by selling the homes they have built. But they have little more chance of paying back these new loans, said Andrew Gerringer, a New York residential property consultant. This may leave funders, who include banks, private equity groups, property debt funds and hedge funds, forced to take over properties and deal with the sales slump themselves.
“Many of the very large condos that may not sell will also not rent at numbers that will cover the mortgages, common charges and real estate taxes,” he said. “What we don’t understand . . . is how these developers go ahead and build without understanding the depth of the residential buyers for their properties.”
The effect of the high-end building boom has marked these cities permanently. The southern end of Central Park, the banks of the Thames and Sydney’s waterfront are lined with new towers. Vancouver has also seen a burst of condominium construction, while thousands of individual family homes have been torn down and replaced with large “McMansions”.
Peter Rees, professor of city planning at the Bartlett faculty of the built environment at University College London, has warned that the Thames could be “lined with derelict towers” in a century’s time, as service charges prove inadequate for replacing glass facades and elevators, which have a limited life.
“Many of the very large condos that may not sell will also not rent at numbers that will cover the mortgages, common charges and real estate taxes. What we don’t understand . . . is how these developers go ahead and build without understanding the depth of the residential buyers for their properties.” – Andrew Gerringer
In London, research by Savills shows construction continues to be out of step with demand. The London market over the next five years will need 42,500 new homes a year for sale or rent at cheaper than market rates, the property agency found – but only about 3,500 a year will be built. Demand also far exceeds supply in the “lower” and “mid” markets, up to £700 per square foot. But above that, planned supply starts to exceed demand. In the £700 to £1,000 a sq. ft. category, annual demand for 7,000 homes a year will be catered for by almost 10,500.
Prices at the top end are falling, but the median London house price remains more than 12 times average earnings. “What we don’t need in London are more £1m-plus apartments with swimming pools, spas, cinema suites and service charges of £7 or £8 a sq. ft. [per year]. Those are not for normal Londoners,” said Herd.
Governments have succeeded in damping high-end markets that had become stores of overseas wealth. But they now face a more complex challenge: Pushing forward construction of affordable homes for the average and lower-paid workers who keep their cities running.
“The situation in Vancouver took about 20 years to reach this climax and it will probably take several years if not decades to fix,” said Yan. “Homelessness is still at an all-time high, and housing precarity seems to be the rule and not the exception for many in the service and blue-collar sectors.
“Housing policies need to be adapted to reflect the 21st-century realities of global finance, mortgages and the hyper-commodification of housing which has changed so much in the past 30 years.”
As for Bhandari, he still holds a bet on new-build property. His enthusiasm was such that during the boom he also agreed to buy a one-bedroom apartment in a tower under construction close to his other, failed, purchase. That building has not yet been completed and he has not decided whether to try to cut his losses for a second time. “At the moment, I’m just watching and waiting,” he said.
By Judith Evans © 2019 The Financial Times Ltd