5 Signs The London Property Bubble Is Reaching Unsustainable Proportions

A thought-provoking blog article by Mr Ed Conway, the Economics Editor of Sky News.

His article is worth a read, though I don't entirely agree with his analysis.

I just put his main bullet points here, including the chart under point 2 which shows that prices across London have indeed shot up tremendously in the past few months.

1. Prices are rising very fast

2. Prices rises are no longer just in “prime” areas

3. Prices are still high in real terms

4. House prices vs earnings are at historic highs

5. Mortgage burden hardly dropped in London

Happy investing!

International Developers moving into London, UK property

Will international developers raise the bar in London's residential development market? This March 2014 report is worth a read, full report available online for free.

This publication looks at the growing trend of international developers moving into London. This appears to be a rather recent phenomenon. Singaporean buyers would have heard of Oxley Groups first foray into London, via their Royal Docks project. Developers from other countries, especially China, are also moving into the London property market.

London needs new homes. Only 15,000 units were completed last year (2013) while the Greater London Authority suggests demand will be closer to 42,000 per annum over the next decade. Demand way exceeds supply - nobody disputes this.

JLL is confident that the recent entrants into the London Developers' market is not one-off. JLL cites China's Greenland Group, Qatari Diar, Hutchinson Whampoa (see my blog post on Convoys Wharf), Singapore's Oxley, Knight Dragon from Hong Kong and SP Setia of Malaysia.  Certain members of the Kwok family also have interests in the Lillie Square, my Earl's Court development.

To quote, "London's lost capacity, and huge volume of undersupply, represents a big opportunity."

The report notes that one of the challenges that international developers face when expanding into London is the lack of scale. London's planning system is a lot more conservative and cautious, compared to where these developers are used to operate.

See the following table for examples of projects by international developers.

Canary Wharf
The report goes into a lot of detail and projects about Canary Wharf. This place has reignited over the past 18 months, following years of inactivity. They have more than 1,200 units under construction. Prices are soaring around the Wharf and the second-hand market is as active now as it's been since the credit crisis. At many developments, prices are 15-20% higher than a year ago, which is staggering.

The dynmics of Canary Wharf housing market have changed too. It is no longer Wharf workers only. Many people move here from West London or South London, attracted by the bright, new build product on offer as well as the lively leisure offerings and great connectivity. There are good restaurants, great shopping, and even escape routes like London City airport. All will get even easier when Crossrail arrives. People love to buy and rent here.

Interview Excerpts - Greendland in London (Page 6)
(GM of Greenland UK, Wenhao Qian)

Greenland Group has only recently entered the UK, with the first project in Wandsworth Town. They are also working on an ultra-high-rise apartment project at Canary Wharf which looks set to become the tallest luxury apartment building in the UK.

Why is Greenland investing in the UK?

London is the financial centre of the world, it is an international city, mature in economic terms, open and accessible and is the most diverse city in Europe. London is also very central in the British economic resurgence. Therefore, London is a milestone on the road of glboal market development for the Greenland Group.

Our thoughts on the Supply in London
Supply is tight, demand is high. What is new now is the entrance of international developers. All this bodes well for the London market - a huge magnet.

From a Singaporean perspective, can you not see that the supply is crazily tight in London?

Think of it this way. The entire Canary Wharf, which is now supposedly so hot, has fewer than 1,300 units in the pipeline. Already, Canary Wharf is one place in London where developers can get planning permission to build high.

A single medium sized condo development in Singapore can easily hit 500 units. Mandarin Gardens (East Coast Park), completed in 1986, has 1,000 units. Commonwealth Tower, just launched, will have a total of 845 units in two 43 storey blocks.  The Pinnacle@Duxton, has almost 1,900 units.

The entire pipeline in London Canary Wharf - 1,300 units, and JLL is raving and ranting about it.

Commonwealth Tower - 845 units, just like that

Happy investing!

Paddington Exchange, London, Zone 1

One of our trusted property agents told us that this is the BEST project they have had for some time. The Developer is Taylor Wimpey.

Property agents - you always have to take their claims with a pinch of salt. But this agent has proved herself to be reliable in terms of recommendations. Our properties bought through her have done very well.
So, when she said this is the BEST project they have had for some time, we took a closer look. So, what's the deal with this Zone 1 project?

London Paddington Station National Rail
First looks, very interesting indeed. Location-wise, excellent. The project is a 5 minute walk to London Paddington station.

Something about Paddington Bear you said?

No, the historic and very central London Paddingtion Station, Zone 1. The station is the terminus for many services, e.g. from Reading, Bristol, Oxford and for inner-and-outer suburban services. More than 35 million use the National Rail through this station annually.

Hello from London Paddington

London Paddington has 14 Terminal Platforms. It is also the London Terminus for the dedicated Heathrow Express - a mere 15 minutes to Heathrow. And that is just the National Rail & Heathrow Express.

London Paddington Station Underground (aka Tube)
London Paddington is served by four London Underground lines through two separate stations. The Circle, Bakerloo and District lines have a combined station to the south of the main line station, and the Hammersmith & City and Circle lines have a sub-surface staiton to the north. Circle line services go through both stations as part of a spiral route. (Circle, remember?)

Furthermore, many commuters just take a short walk to Lancaster Gate Tube station for the Central Line. This will get them to the City or the West End, and is usually faster than other routes. In total, the London Underground served more than 46 million out of London Paddington.

Ok, very good so far. This place must be very central, and it is.

Crossrail - the icing on the cake
Compared to other Zone 1 builds, this place will get Crossrail. Yes, I hear your wows.

Examples of Centrality
Heard of Bayswater? Ok, maybe not. What about the famous Duck? Yes, go to Bayswater for the Duck. From Paddington, 1 stop to Bayswater, just one.

Imperial College -  the Circle Line takes you to South Kensington in 5 stops.

UCL -  Hammersmith Line takes you to Euston Square in 4 stops.

Not very convenient to LSE. (London School of Economics) at the moment. However, once Crossrail comes online, it is literally 3 stops to LSE with just one change. Crossrail power.

OK, you got my attention now. What's the Damage? Obviously, a BEST project like this won't come cheap. If it did, something must be wrong right?

Prices

You are looking at GBP 1,400 to 1,500 psf. E.g. a one Bedroom on the 5th floor, 888 sq ft (rather big) - abt 1.25 Mil GBP.

Well, obviously this is not an every man's property. This is right smack in Central London, premier location, high-class property. It doesn't suit us, as we have explained in our other blog posts. Anyway, for all practical purposes, we can't afford this.

However, this does not mean that the property is no good. In fact, I would venture to say that if I had the million odd pounds to spare, I would seriously look at this property as a long-term investment. (Usual disclaimers apply)

Do share your views on my community forum here. 

Important Disclaimer - . The views contained in this blog and blog post are entirely mine. We cannot be made responsible for any investment decisions you may, or may not, take. Nothing in this blog can be construed as professional investment advice, as we are NOT professional investors and we are ill qualified to give you any advice.  Read the blog at YOUR own risk

The Forge, Wesfery Road - 10 minute walk to Mudchute DLR

When I first read this advertisement! I thought I could walk from this development to Canary Wharf in 6 minutes. Wow, that sounded very attractive and the price looked good!

However, the fine print in the newspaper advertisement has clarified that the development is a 10minute walk to the nearest Docklands Light Rail station called Mudchute. From Mudchute, it is indeed 6 minutes to Canary Wharf, by DLR.

So, the development is not so near after all. Remember to read the fine print. At least the advertisers did not give the wrong impression that you could walk from this development to Canary Wharf in 6 minutes. Their 6 minutes referred to the time it takes from Mudchute DLR and you need to read the fine print to realise that the development is a 10 minute walk to Mudchute DLR.

Where exactly is this development located? It is in a place called the Isle of Dogs. Again, Google maps is your friend. This development is almost completed, if not already completed and you can see the building from the Google maps street view.

Snapshot of the location, see the dropped red pin. I think this is where this development is located but I stand corrected. Best to check with the sales agent. You can find Mudchute DLR to the northeast of the red pin.

Speaking of which, why is the DLR station called Mudchute station? Apparently this place is literally a Mud chute, where the mud from River Thames ended up here and was deposited here. The mud chute park and farm is a place for wildlife. The scenery near the park is actually quite pretty.

Isn't this gorgeous?

Also there are houses with some water facing near Mudchute DLR that look very nice.

Overall, the immediate area looks rather residential and would probably be rather pleasant to live in. Just be aware of the transport links and walking distance to the nearest DLR.

Happy investing!

Important Disclaimer - . The views contained in this blog and blog post are entirely mine. We cannot be made responsible for any investment decisions you may, or may not, take. Nothing in this blog can be construed as professional investment advice, as we are NOT professional investors and we are ill qualified to give you any advice.  Read the blog at YOUR own risk

Royal Wharf, Double Glazing Won't Block Out All Noise

I have shown in previous blog posts that the Royal Wharf site is situated very near the London City Airports.  

London City - More than 200 Flight Movements A Day
This Airport has more than 200 flight movements a day, on average. It has permission to operate up to 120,000 flight movements per year, currently it is operating about 70,000 flight movements a year.

Double Glazing
The issue to be addressed in this blog post is whether the double glazed windows as promised by the developer of Royal Wharf would be useful. Some agents I have talked to on the noise issue give me the impression that these windows will block out all noise, like magic.

What Can Double Glazing Do?
What exactly is double-glazing and what type of double glazing is being used? Another way to ask this question is as follows - how many decibels of noise can double-glazing cut? With these research questions in mind, we can start searching the Internet and/or asking experts.

Findings - Normal Double Glazing Reduce Noise by 20 Decibels
Here is what I found, and I stand corrected (since I am not an expert on double-glazing). Typically, double-glazing windows can only reduce the noise by 20 decibels, which isn't too bad. 

The best noise reduction results I have seen so far is what is called a laminated acoustic double glazing window which can reduce noise levels by up to 35 decibels. Source: www.double-glazing-info.com

Now, what type of double-glazing is the developer installing for the unit? It is not clear from the marketing collateral. What is very clear, however, is that double-glazing doesn't work like magic to cut out all the noise.
The next logical question to ask is this. How loud are the planes when they take off? 

See this video where a person measures the sound of a passing plane. It reaches a whopping 81 decibels. 

If your double-glazed windows can only block out 20 decibels of noise, it means that you still have 60 decibels coming in. 60 decibels is as loud as a normal conversation. You may think that sounds reasonable.

But think of it this way. Every time the plane takes off or land (200 movements a day), you have to hear somebody 'talking' to you, even though you don't want to hear that person. Bearable?

Don't forget, your double-glazed windows would help cut noise if and ONLY IF, they are shut. Wait a second, isn't that obvious? What's the big deal?

Royal Wharf Units have No Air-Conditioning
Do you know that the Royal Wharf units do not come with air-conditioning? Before you scream at the developer, cool down and realise that this is London, not Singapore. Only the very high-end UK properties and developments come with some type of heating plus air-conditioning system. The bulk of residential developments only have heating elements.

Ok, so what's the point?

Rely on Natural Ventilation
UK properties, even London properties, rely on fresh natural air for their day-to-day air circulation! People leave their windows open. They expect to be able to leave their windows open for the fresh air.

Now you see what I am driving at? People in London would like to leave their windows open. In summer, when it gets warmer, would you want to live in a flat that you can't open the windows lest 80+ decibels of aircraft noise overwhelms you?  Oh, whatever the case, do buy a fan for the summer. It may help the stuffiness. 

Anyway, Noise is to Be Expected in a City 
Well, London is a big city and not the countryside, therefore some level of noise is to be expected.  Given that the Royal Wharf development doesn't face a main road, one can expect little if any noise from traffic. Also, the London City Airport does have flight time restrictions, so you shouldn't be disturbed at night. 

Happy Investing!

Back to Royal Wharf Landing Page

UK Property - Must You Complete After Exchanging Contracts?

Question – Must you complete on an off-plan property that you had exchanged contracts on? 

Good question. If you are buying an off-plan property in the UK, you will first be asked to pay a reservation fee (usually ranging between GBP 1000-5000) to book a unit. The developer and sales agent will then take this unit off the market.

You will be given a deadline to exchange contracts, during which at least 10% of the purchase price (less the reservation fee) will be paid through your solicitors.

Understand that unlike say Singapore, most of the payments towards a UK property occurs at completion. For our properties, the standard was 10% to exchange contracts, and then 90% at completion.   Sometimes, the developer may ask for another 10% say 12 months before scheduled completion.  Make sure you negotiate the payment schedule before you exchange contracts.

We have have seen nothing like what we have to pay in Singapore. By the time the off-plan property TOPs in Singapore, you would have already paid 70% to 80% of the sales price to the developer!

After you reserve your unit, you will have to appoint the solicitors who will handle the purchase for you, and work towards the exchange of contracts.

You can pull out after the reservation stage if you change your mind; whether you lose your reservation fee will depend on the developer and selling agent’s policies.

However, if you have second thoughts, this is the time to pull out, and not any later. Once contracts are exchanged, things become legally binding. You are contractually obligated to complete, unless you manage to do a sub-sale.

Sub-sale?
Yes.  Another term, is to flip the property before completion.  Take note, however, that this is not common in the UK, though in recent times it is becoming a bit more common.   I wouldn't bet on it.  Even if your plan is to flip the property, we would strongly recommend that you have the funds to complete the purchase.

Investment Risks
Bear in mind, your financial circumstances, economic conditions or even personal preferences may change while the property is being constructed. This is a risk you are bearing as an off-plan investor.

The unit may take any time between a few months to several years before the construction is completed.

Between the exchange of contracts and completion, you may or may not be required to make further payments, and the payment terms would have been clearly laid out in the contracts.

Further Payments
Some developers require further payments of 5% or 10% of purchase price a year after the exchange of contracts. Once the developer issues the notice of completion, you are legally obligated to see through completion.

If you are not able to complete for any reason, the developer may take legal actions against you. Please do all due diligence before you exchange contracts. A good solicitor will be able to advise you well.

What Happens If You Really Pull Out? 
Do not foolishly assume that you will only forfeit your 10% (or 20%) deposit.  If you do not complete, you have technically breached the contract and therefore the developer can sue you for damages.  The developer will surely win, in the event of such a lawsuit.

Is this fair?  Of course it is.  Think about it this way.  You put down 10% deposit for an off-plan property.  2 or 3 years later, if the property market tanks (e.g. prices drop by 30%), you may be better off walking away and not completing if all that you lose is 10%.  In such a scenario, when the market is bad and you did not complete, expect the developer to sue you and attempt to get the full price from you.

In reality, if the market has gone up, then it is likely that the developer will resell the unit quickly.  If successful, the developer can still sue you but the damages that the Court would award would likely be a lot less, because the actual damage suffered by the developer is much lower.  In fact, the developer could have made more money this way, if indeed he could sell at a higher price that what you had contracted with previously.

In all the advice we have read, you are strongly recommended to ensure that you have financing and you can complete on the property before you sign on the dotted line to exchange contracts.

Tenants, UK Property

Tenants 

London is a global city and attracts talents from all around the world.  The same can't be said for the rest of UK, so we have not gone into UK property outside London.  Your tenant pool will be wider if you keep an open mind. You should however be mindful of protecting your own financial interests.

Significant Voids Not Expected
If your property is correctly priced, you should not experience significant voids. If your letting agent is not actively marketing your property, switch out. You can also list your property for let with multiple agents, though that will mean more coordination work for you.  This has been our experience for our London properties.  Not sure about UK properties, outside London.

Significant voids unlikely, as long as your price is right.

If you have multiple units, you have more bargaining power. Pick the arrangement that works best for you. In general, we give sole marketing rights to a single lettings agent only for a limited time, say one month.

Tenant's Deposit Must Be Protected
The most important thing about tenant deposits that you as a landlord of UK property must know and heed is that you are legally liable to ensure the deposit must be registered with an approved authority within 30 days of receiving it. There are strict penalties if you do not observe this.

This webpage explains it well. If the letting agent is registering the deposit for you, ensure that you have a copy of the registration certificate. We had a rogue letting agent who did not register the deposit properly and our tenant was in a position to take legal proceedings against us! UK property landlords, do not mess around with deposits! Thankfully, the deposit serves as a good protection and buffer for landlords, to recover damage costs and/or unpaid rent.

Some tenants are lovely.

What sort of tenants should you look for?

First, do familiarize yourself with UK legislation regarding the eviction of tenants. A non-paying tenant is every landlord’s nightmare, especially if you have to take steps to evict the tenant. As such, it is in your interest to ensure that the tenant is able to afford the flat financially.

Second, discuss with your lettings agent on the profile of the applicant. All the lettings agent we have used so far generally go by the rule of thumb that the rental should not exceed more than a third of the applicant’s monthly income. Thankfully, we have not had experienced a rental default thus far with individual lets.

Our tenants have all been regular salaried individuals, some of whom are working in the City of London. They value their tenant profiles and credit history and would not want to blemish their own records. They have also kept the apartments in good shape.

Should one then insist only on professional tenants? Our view is, perhaps not. There are many categories of tenants who are able to afford the rent, but for some reason or other, do not have employment records in the UK, and thus will not pass the traditional affordability checks.

Take for example, students, as well as professionals who have just moved over to the UK. They would make good tenants too, but as a way to mitigate your risks, you can negotiate to have rent paid upfront, or to request a copy of their bank statements as proof of funds.

Corporate Lets? 
How about corporate lets? One of our apartments has been let to three different companies to date. Corporate lets tend to be above market rental rates. However, there is huge disadvantage in that they tend not to be pay deposits, but have a letter of guarantee in lieu of a deposit. The letter of guarantee is pretty much useless if the company goes under.

Do research the company to ascertain if it is likely to make a good tenant. If your apartment is let to a big corporation like Barclays or Morgan Stanley, I think there is little cause for concern. However there are many other smaller companies looking to rent apartments as well.

Also, check the eviction clauses to see what recourses you have if the tenant defaults on payments. A lack of deposit does increase the risk for landlords – you will have to weigh out the potential benefits and costs vis-à-vis a private let. We have experienced a rental default by a serviced apartment company before and we had to evict the tenant. It was a costly exercise for both the letting agent and for us.

Back to our buying a newbuild page. 

UK Property Market - Some graphs and charts

Here are some very telling charts taken from the BBC - http://www.bbc.com/news/business-24387237

Look at the UK housebuilding starts and completions per quarter, from 1978 till 2012.  Can you see that housebuilding completions have dipped from 1978 levels and stayed rather flat throughout 1980 to 2007, but from the credit crisis in 2007 onwards, there was a huge fall.

So, not many UK properties have been completed.  Is there enough property stock in the UK?  There is consensus that housebuilding in UK, especially London, is chronically short, i.e. huge under-supply.  From the 1970s till date, the population of UK has also increased, from about 56Mil in 1975 to 63Mil in 2012.

This chart on first-time buyer mortgages show the effects of the credit crisis and the credit market tightening from 2007.  The number of mortgages has certainly not recovered to 2007 levels.  Of course, you may think that 2007 was too much of a bubble.

Another chart on tenants versus owners.  Many tenants, and tenants-reduced price in the UK.

Conclusion
There is a lot of UK property data and charts from many credible sources all online.  Read them and consider whether there is a shortage of supply.  We have come to the conclusion that supply in the London market is really short, while demand is strong.  Therefore, we think that our investments are fundamentally sound, however, the caveat is that we purchase properties that we think will have widespread potential in the UK resale market, i.e. we want the comfort that we can easily sell our properties to locals.

This has guided our investment philosophy in the UK property market.  This is why we stay out of the very expensive and luxurious new-builds we are seeing now, especially in Central Zone 1 London.

Zone 1 Prime Central Location, or Further Out?

No doubt that anyone who had bought any Zone 1 property prior to 2010 is now reaping large capital gains. Prime central London has always been sought after by investors from across the world.

Greater London property has appreciated too, but the appreciation of prime central London over the past decade has outperformed most Greater London areas. The properties we have bought so far are fairly humble, and are largely in zones 2-3, with good transport links.The most central investments we have are the Brickmakers Apartments, which is not exactly in zone 1, but is a comfortable 10 minute walk to Tower Hill underground station. (City of London)

London Zone 1 - Be prepared to pay millions ££

Why not Prime Central London?

1. Capital outlay much higher
Initially, given that we were new to London property, we were cautious and preferred to work with a bite sized investment. The capital outlay involved is obviously much higher with Central London property.

2. Rental yields generally lower
Rental yields are generally lower in Prime Central London than at the outskirts. This is especially pronounced if you are purchasing in today's market. Ex-council property aside, it is almost impossible to find a property in Prime Central London that gives a yield of 5%.

3. Plan to hold and not flip
We plan to hold on to our London investments for the medium to long term, and as a means to store savings value and hedge against inflation, our focus was not on immediate capital gains but a stable and high yield.

4. Multiple smaller investments over one large investment
With this investment philosophy, we opted for multiple smaller investments over a single Prime Central London acquisition.  Although it takes more effort to manage the portfolio, it also gives us more flexibility. It is not an all or nothing situation.  We can sell some along the way, if the need arises.

5. To flip or not to flip?
We have heard of the huge capital gains Singaporean investors have made with Zone 1 property. Some have even succeeded in flipping properties before completion, which saves incurring the stamp duty expense. Flipping property is not as prevalent in the UK as in Singapore and to flip for a profit in London was unheard of just a couple of years ago as new builds are known to be priced at a premium.

Now that we are more comfortable with London, we have started to look at Zone 1 properties. We may have missed the boat as prices are now very high. New builds at the Eastern side around Aldgate are priced at 1000 £ psf, as are the Nine Elms developments. Developments at the South Bank and Kings Cross areas are even more expensive.

We may have to start looking at the resale market for opportunities.

We buy to hold, not flip.

Back to Buying a Newbuild Page

Royal Mint Gardens by IJM Land

Royal Mint Gardens by IJM Land

A luxury development by IJM Land and marketed by Knight Frank.

It turns out that IJM Land is one of Malaysian's largest property developer, listed on the Malaysian Stock Exchange.  We were very interested by this development as it appeared that this was IJM Land's first foray into London.

(image taken from the royalmint website)

Location
The location is very promising. It is very close to the City of London.  For my recent site visit, I got off at Tower Hill Tube Station and took a walk towards Royal Mint Street.  It was about 3 minutes walk (ok I walk quite fast, but most Londoners do!)

On Google Maps, this development it is on Royal Mint Street (which is a very short street), and right next to Tower Hill Docklands Light Rail (DLR) station.

A short video I took of the location back in Oct 2013. It was a rainy day. You can see the plot of land and how close it is to the DLR station.



High Price?
Well, you can't fault developers for trying to make good profits.  In terms of price, we felt that this development was priced rather aggressively (800 to 1,000 psf).  However, now that I have physically been on site, I don't think that the pricing is unreasonable.  In terms of potential capital appreciation and rental potential, this development is very strong in this respect.  Why didn't we buy?  Well, the price tag was a tad too hefty for us.  You can read more about our investment strategies in this post.

You may think that the immediate area looks rather run-down.  To tell the truth, it is.  The issue is whether the area has the potential and whether there are more investments coming in here.  The answer to both question is yes and yes! There are many exciting developments coming up in this vicinity.  Why?  Location-wise, it can't be beaten.  It is right at the door-step of the City of London.

The Royal Mint Development would definitely help transform this entire area.  I certainly look forward to Royal Mint completing in 2017!

By the way, this development is also very near the Broadgate Complex that GIC has invested in.

Back to our welcome (& content) page....