London developers are again busily flogging off-plan apartments to Asian investors. Prospective buyers would do well to ponder the lessons of history, says Ross Clark
OF ALL SECTIONS of the property market, none was quite so damaged by the financial crisis as that
for off-plan apartments. The collapse of the market in 2008 was accompanied by accusations of mis-selling and fraud, as it emerged that many properties had been over-valued for mortgage purposes, leaving banks exposed to huge losses.
Two years on, developers are selling off-plan apartments in London once more — so long, that is, as the developers are prepared to jump on a plane to the Far East in order to sell them. In fact, it is only thanks to Far Eastern investors that any new apartments are being built in London at all. When financing property developments, banks nowadays insist that a certain proportion of units are sold up-front, and the only way developers can achieve those sales is to look to the Far East.
British buyers have all but ceased to buy new flats ‘off-plan’, says Ed Lewis of Savills. ‘Three quarters of off-plan flats in London currently being sold are going to Far Eastern buyers. With one recently completed development, Grosvenor Waterside in Chelsea Bridge Road, we haven’t even launched it in Britain; we just took it to the Far East.’
The number of properties being sold to Far Eastern buyers is not a flood, but it is not a trickle either. Of all 7,579 sales of new property in central London tracked by Knight Frank in the year to March 2010, 41 per cent were bought by investors and of those, 49 per cent were Asian investors — which makes for around 1,500 property sales to Far Eastern buyers. Some of the Far Eastern investors already have properties in London, and some are buying in the hope of sending their children to British universities. But some have never even set foot in Britain: they are putting down their deposits on the strength of roadshows in Far Eastern hotels.
Why are wealthy Chinese flocking to the West? By proving their net worth and investing a certain amount in Britain or the United States, Chinese citizens can gain permanent residency. For Britain, they must invest £1 million for five years, but given the high number of Chinese millionaires — thanks to a booming domestic property market and the rapid growth reflected in the rocketing GDP — this is becoming less of a barrier. They are doing so because they see the London market as a chance to pick up property on the cheap.
To those of us who measure our wealth in sterling terms, the London property market may seem to have recovered much of its value over the past 15 months, with prices now just 10 per cent lower than they were at the peak. But that is not how it looks from the perspective of a Far Eastern investor. In Yen terms prices are 45 per cent cheaper than they were in 2007, and in Yuan terms they are 38 per cent cheaper.
The situation now echoes that between 1994 and 1997, when sterling was at a low ebb thanks to the ejection of the pound from the Exchange Rate Mechanism and Asian investors accounted for half of all new apartment sales along the Thames. On that occasion Far Eastern investors did fantastically well. But that doesn’t necessarily mean they will do well this time around.
The image of Chinese queuing up in exhibition halls to put down deposits on unbuilt flats 8,000 miles away is a mirror of the overseas property shows that used to tour British motels during the boom flogging off-plan villas on the Med. A lot of us thought people mad to be chucking their life savings at, and taking out huge mortgages upon, properties that existed only as artists’ impressions in countries of whose language, customs and legal systems they had little knowledge. So it proved: many have been lumbered with properties worth a fraction of what they paid, and some have lost the lot as it turned out the properties they bought had been built illegally.
So are the Chinese buyers putting their money down on London properties any more sensible? Many of these investors, after all, are the same people who have been fuelling a mad property boom in Hong Kong that now looks like going pop. ‘There are some developers who are taking property roadshows to the Far East and pushing the property misdescriptions to the limit,’ says Ed Lewis. ‘They tend to use the name “London” wherever the development happens to be. One development in Croydon has just done very well being sold in the Far East.’
One estate agent used to tell me the story of a Far Eastern investor in the late Nineties who managed to buy a flat without realising that it had no windows, other than one on to the building’s central stairwell.
More recently, investors have been attracted into land development schemes without a full understanding of the British planning system. One company has sold £50 million worth of development plots on a west London gravel pit through a Far Eastern marketing programme, with investors promised a 250 per cent return if the land gets permission to be developed into housing. I wonder how many of them appreciate what greenbelt land is, or that the land was previously owned by a volume housebuilder who disposed of it out of frustration in trying to secure planning permission.
Whether they are smart or over-enthusiastic, interest from Chinese buyers in London apartments will not be enough to return the market to what were, for developers and estate agents, the glory days. Sales of new apartments in central London are running at just a quarter of what they were at the height of the boom in 2006/7. It will take more than a few roadshows in Chinese hotels to turn that around.