London land prices rising faster than the cost of luxury homes
THE only part of the UK real estate market that is rising faster than London’s luxury homes is the land underneath them. Housing plots in the UK capital rose 87% to the end of the first quarter from a trough in 2009, broker Savills estimates. That could turn around quickly if interest rates increase, according to Alexander Michaelides, a finance professor at London’s Imperial College who studies the relationship between land and the economy.
Gilt yields have been rising as investors bet the Bank of England will be forced to raise its benchmark interest rate from a record low earlier than the 2016 horizon indicated by governor Mark Carney. Rising rates increase the risk of falling land values as home-buying becomes more expensive. In cities such as London, where there is a scarcity of development land, values are more sensitive to economic changes, Prof Michaelides says.
“Land scarcity makes the response to fundamental shocks a lot more volatile,” he says. “It is a risk that the Bank of England should be taking into account when they make their policies.”
Prices for luxury homes have soared in recent years as the debt crisis in the eurozone and uprisings across North Africa made London property a haven for international investors. Prime London residences have risen more than 60% from their low in 2009, according to broker Knight Frank.
With rising prices across the UK putting home ownership beyond the reach of young Britons, political parties are pledging to ease planning curbs and build more homes. The opposition Labour Party said this week it would allow local authorities to charge developers who do not build on land that has received building approval.
Chancellor of the Exchequer George Osborne has been promoting home ownership by assisting buyers and making mortgages easier to obtain as he seeks to revive the UK economy. Despite those efforts, approvals to build new homes in London fell about 15% in the first half from a year earlier, according to data compiled by researcher Glenigan for the Home Builders Federation.
Home builders were the main beneficiaries of the land prices slide that followed the financial crisis as they boosted profit margins by developing plots bought at a discount.
The average market value of British publicly traded residential developers has more than quadrupled in the last five years, Colin Sheridan, an analyst at Dublin-based Davy, wrote in a recent note. Development land values for the country overall are 50% below their 2007 peak, real estate services provider Savills has said.
In London, land prices now exceed the previous high, according to the broker. The 87% jump since their trough in 2009 compares with an increase of more than 60% for
The average market value of British publicly traded residential developers has quadrupled in the last five years
London luxury homes and a 43% gain for all residences in the city, Knight Frank estimates.
British Land bought a site in London’s Mayfair district to develop luxury flats last year, using the proceeds from a £400m bond issue.
The Bank of England last expanded its stimulus programme known as quantitative easing in July last year and investors are betting policymakers will raise the 0.5% benchmark interest rates as early as 2015 as the recovery gathers strength.
In the US, the Federal Reserve will take the first step to reduce $85bn in monthly bond purchases in December, according to 59% of 41 economists in a September 18-19 survey. The 10-year gilt, which yielded less than equivalent Treasuries as recently as September 4, now yields 12 basis points more, data show.
A “disorderly unwinding” of the quantitative-easing programme in the US could result in home prices in the best parts of London falling as much as 20%, Fathom Consulting wrote in a July research report. Central London residential values “have become somewhat stretched, suggesting that they are now vulnerable to correction”.
Not everyone agrees. “It’s a residential market that is driven by world city dynamics rather than by ordinary domestic” factors, Simon Rawlinson, head of research at construction consultant EC Harris, says. “More and more developers are entering the market and are able to make the numbers stack up.”
Developers are building on land at the fastest rate since 2008, Savills said in report last month. London land values are forecast to continue to increase as the home market is less reliant on customers having access to mortgage credit, associate director Paul Tostevin said. The broker does not include the effects of a potential interest rate increase in its forecasts for land prices, he said.
“You get a magic moment in the cycle which you’ve got land that you’ve purchased relatively cheaply at the bottom of the cycle, your costs aren’t rising and prices are going up, so that’s where you get the maximum profitability,” Mr Rawlinson said. “Going forward, in terms of more expensive land, profitability is more likely to normalise.”