In the dark days of 2009 / 2010 when most development lenders were in hiding, the one type of project that might get them to pop their head out would be a prime residential developments somewhere like Knightsbridge or Belgravia. It was probably the area of the residential market that took the smallest hit in the downturn and certainly recovered very rapidly as international buyers saw certain London postcodes as the safe haven in the property market. The net result was values in these areas sored for several years and we saw clients selling very high spec apartments in the best postcodes for around £6,000 per sqft in late 2013. However in 2014 we’ve seen a few high value properties stick on the market and volume of sales has certainly fallen.

 

We aren’t expecting a crash in values in this market but most lenders have gotten very nervous about financing new projects in this market for various reasons. Firstly most already have quite a few prime projects on their books so are concerned about over exposure to one area. Secondly if trying to sell a £20m house the number of buyers at that level are few and far between whereas if you’re selling 40 x £500k apartments you are likely to find at least some buyers from both the homeowner market and the investor market – the time it takes to sell a £20m property could be significantly longer than small units amounting to the same value. Thirdly the current political climate looks set to bring changes to Stamp Duty and / or introduce a Mansion Tax which will almost certainly hit the high value properties harder than other parts of the market. The final point is the difficulty valuers have been having in this market and the opaque nature of some of the documented sales. For the very high end of the market prices per sqft can range from £2,500 per sqft up as high as £6,000 per sqft just a stone’s throw away. Therefore if a developer is pushing the higher limits in their appraisal and the valuer takes a more conservative tone then a deal could fall apart on the valuation report.

 

Funding for prime projects has not completely disappeared but most lenders are now focusing on projects delivering multiple units at lower end values per unit. To get prime residential deals to work for funders we feel there are a few key rules to follow. Firstly multiple units will be favour over one large property – lenders perceive this to carry less sales risk. Secondly be conservative on valuations – developing in Knightsbridge doesn’t necessarily mean One Hyde Park is an appropriate comparable and valuers will certain be fairly cautious when valuing. Finally allow plenty of budget for the build – there has been considerable build cost inflation in the last year and in the prime market spec changes might be necessary to keep up with buyer expectations.

Newsletter    |    2014  Q4

FINANCE FOR PRIME RESIDENTIAL PROJECTS COOLS

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