As we first pointed out back in April, due to slumping demand for luxury apartments in the UK, desperate developers had started to offer significant discounts in an indication that the UK real estate bubble had officially burst.
Today, we receive further confirmation of that fact. In order to stem hot money flows into the market (see: China), the UK implemented a 3% tax on anyone purchasing a second home. This effort has slowed the demand for luxury real estate, catching developers off guard, and has created even further oversupply issues for developers to deal with. As even steeper discounts are provided in order to try and fill vacancies, margins are coming under significant pressure.
From the FT
Widespread discounting of newly built luxury apartments is cutting into developers’ margins, prompting cost-cutting measures and delays to projects across London.
Developers including the FTSE 100 companies Barratt Developments and Berkeley Group are offering “stamp duty paid” deals in the capital, which amount to a discount of at least £30,000 on a £800,000 home.
Such deals are reducing developers’ margins by about 4 percentage points on “prime” homes costing £1,350-£3,499 per square foot, and 7 percentage points on “super prime” homes priced above that, according to data from Arcadis, a building consultancy.
Developers plan for a typical profit margin of 20 per cent, said Mark Cleverly, a partner at Arcadis, but have faced a different picture since the stamp duty rise on luxury homes cut into an already faltering market.
“This hits straight at the margin, at a bad time for the market,” Mr Cleverly said, arguing that higher stamp duty amounts to a “tax on development”.
Barratt is offering discounts from £32,149 on selected homes in its Nine Elms Point development, which is part of London’s largest residential building site in Battersea. Berkeley Group offered discounts on its Riverlight apartments in the same area, which have now all been sold.
The rush to buy land and construct apartments is now coming back to haunt developers as the demand is slowing. The number of homes in development and coming to market is creating an even larger supply glut, and will continue to cause downward margin pressure as discounts become even more pronounced.
The Nine Elms area, where 19 developers are constructing at least 12,800 apartments, forms part of a wave of new luxury flats under construction. Some 35,000 are planned over the next 10 years, according to Arcadis. This has raised concerns over a potential oversupply.
Developers vied to acquire land for prime London homes as values rose after the financial crisis, but the market has since softened thanks to the large supply, a fall-off in demand from Asian buyers, and higher stamp duty on homes costing more than £937,500 from December 2014.
Developers are scrambling to figure out just how to deal with the oversupply, from delaying projects to scaling back the size of some planned developments in order to make the apartments more affordable. Whatever decisions are made, one thing is clear – the pain in the UK real estate market has just begun.
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