New Build Apartments Over-Supply

Over-supply of new build apartments is a topic I have written about many times – and will no doubt continue to write about as long as there are gullible investors.

New Build Apartment Over-supply

Way back in 2005, in the first edition of my book, “Successful Property Letting, How to Make Money in Buy to Let” – see links to it in the tailpiece – I was warning that folks who bought new build apartments in city centres, whether for the luxury end of the market or for the lower end (and for the flats catering for students), there’s always the risk that too many would be built, driving down rents and re-sale prices.

I have always made the point that in cities, generally, it will be possible to “build up” like Jacob’s Ladder, with ever taller buildings. This means the supply of new build flats can be almost unlimited, which will always have the potential to hurt achievable rents and capital values.

For this reason, in my own portfolio and for the people I advise in my private consultancy, I generally advise people to buy houses rather than flats. If they must buy flats, then I tell them to at least buy one with some open space on the ground and / or buy in lower rise blocks where new supply will be limited and future demand is strong.

The fact is that God only created so much land and air. But while man can build into the air as high as existing engineering skills allows, he cannot create more land on the ground. And you don’t need to believe in God to believe that!

And yet we still see “investors” being led by clever marketing people to buy into flash looking apartments, usually without ever seeing them and with no understanding of local demand and supply issues or what is sustainable in terms of local earnings levels.

The Financial Times, on 29th June 2019, reported how one Indian investor bought a three bedroom apartment off plan in Keybridge House, south of the Thames. Naturally, it looked great in the brochure with views of The Shard and the river. He was promised that by the time it was finished it would be worth 15% more than he had paid for it. But his mortgage lender has now valued it at 20% less than he paid, leaving his investment far under water.

Asian, Russian and Middle Eastern wealth have sunk a lot of money into similar schemes around the world. Property expos in Shanghai, Bangalore and Dubai target naive investors with lures of great rents and high capital growth. Smart, good looking sales people, neat presentations and glossy brochures help the sales process along.

New York, London, Vancouver, Melbourne and Sydney are just a few key cities where high rise apartments have been appearing in droves. Take the train out from Waterloo main line station in London and for the first three or four miles to the south west you will see high rise tower after high rise tower under construction. But who will fill them?

Well, not enough people will. That is why we have now seen prices of these falling for five years. In some cases, builders are struggling to get development financing to complete them and many new schemes will remain unfinished.

New Build Apartments, New Taxes

In some cities, like Vancouver, the drop off in apartment prices was made worse when the local government bought in a special tax to curb overseas buyers. In the UK too, big increases in stamp duty land tax and other taxes on second home owners has also been a factor in the tapering of the new build party. Cities like London have also become increasingly angry about the fact that many apartments are often left empty, which also kills local businesses and the buzz of city life generally. (Many apartments in London are as a sort of bolt hole in a safe country for potentially at-risk wealth back home).

And for those that will eventually may actually be rented, the predictable (and bonkers) talk of rent controls by people like London Mayor Sadiq Khan will not have helped future confidence in new build either.

Inner London now has 1,500 completed unsold new homes according to research firm, Molior and Savills says the over-supply problem in London is most acute for flats valued at over £700 per square foot.

Meanwhile, away from the luxury end of the market, more than 1,000 investors have been hit by the collapse of a company behind a £100m property scheme that marketed student accommodation on Facebook and at a property showroom in Dubai.

Here too, many investors were from the Middle East and Asia. They were told they could expect annual returns of 8 to 12 per cent.

The collapsed company is called A1 Alpha Properties (Leicester) Limited and it went into administration back in February.

The idea was that investors would reap the rewards from the growth in higher education. But those old, pesky economic rules of what happens when you over-supply something came to the fore again. It is thought that just over half the 2,000 rooms in the firm’s nineteen buildings in sites mainly in the north of England are sitting empty.

A report by EY, the consulting firm, said in 2017, that the provision of student accommodation had reached saturation point in some local markets.

At the same time, demand may be falling too. Young people are increasingly questioning the value of a traditional three year university degree and opting instead for paid apprenticeships, which come without a loan and big debt attached.

This story of gullible investors being parted with their money by sharp suited salesmen armed with posh brochures and snazzy presentations will never end. And that applies whether we are talking about high-end new build flats or lower-end student accommodation.

New Build Apartment Over-supply – Our Advice

As an advisor, I spend a lot of time teaching folks how to identify current and future supply and demand in places where they may be investing. For those buying to let to young professionals or students in “student towns”, even if buying a house (not a flat), one still needs to be very wary of what’s “coming down the track” in terms of new build flats for the student market, as a few big, new blocks can really damage returns right across the piece.

In the meantime, I would steer clear of buying shares in student housing providers such as Unite and Empriric. I see the latter’s shares are really struggling at the moment. The collapse of A1 Alpha will not have helped confidence in their shares one jot.

I have advised quite a few people from overseas. Generally, I understand that being based overseas, they tend to like the idea of an apartment, (rather than a freehold house), where everything is looked after by a block managing agent.

I accept this and have always steered them to buy flats only in areas where there will be strong future demand, (often underpinned by new infrastructure like rail links and airport expansion), and a limited amount of new build supply.

They have all done well. However, I pity the folks overseas who flock to the flash property shows overseas and who never get to hear my voice or get my advice.

The article on A1 Alpha properties was called “Investors Hit as Student Room Scheme Fails” and was in the Financial Times news section on 29th June 2019. The link is here: https://www.ft.com/content/1db98d5c-98c5-11e9-9573-ee5cbb98ed36

The article, “High-rise, High Spec, High Risk” was in the Financial Times, House and Home section on 29th June 2019. The link is here: https://www.ft.com/content/ea9c9abc-943d-11e9-aea1-2b1d33ac3271

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2 comments

  • Also in the last few years there has been massive press coverage about dodgy dealings of big property developers, where they sell the property to a 1st time buyer, then sell the freehold to someone else in Asia so they can charge whatever ground rent want in the future they want and sell the managing to another party. There is no reason for a new build house to have ground rent or be on leasehold. Absolute con.

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