London’s ‘ghost’ towers: an attractive investment

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With many luxury apartments in the capital’s residential towers left unsold after development, lower prices and options to buy in bulk present an interesting investment opportunity, especially when considering the use of bridging loans to finance the purchase.

Following the significant drop in demand for expensive new-build homes among individual buyers, almost 40% of London’s new luxury apartments have been sold off in bulk to corporate landlords, which is often done at a significant discount. According to Molior, some 2,008 new-build homes, which comprise 39% of sales in the second quarter this year were bought in bulk and offered discounts from 10-15% to asking prices and in some cases reached as much as 20-30%. Such bulk purchases were mostly made by build-to-rent providers, including the US group Greystar, the housing association L&Q, the fund managers M&G, and Quintain. On the other hand, developers completing the sale find that such transactions make a contribution to their EBIT even if the sale price with the discount is below their initially anticipated gross margin.

Despite most owner-occupiers being priced out of new homes in central London and tax changes reducing the demand from UK-based buy-to-let investors, there are as many as 500 more towers are in the pipeline for London, equating to 68,000 housing units, 46% of which are still unsold. The most recent example is Centre Point skyscraper, a 33-storey former office block near Tottenham Court Road that was converted into residential apartments in 2015, gaining its title of a ‘ghost tower’ after the developer had given up the sale of luxury apartments via estate agents. This came as a result of receiving desperately low offers that were well below the asking price, which ranges from £1.8 million to £55 million, and resulted in only about half of the 82 apartments in Centre Point being sold. Similarly, since its completion six years ago, The Shard has experienced difficulties in selling 10 apartments at the top of the tower worth up to £50million.

Despite their attractive character points, the UK government’s statistics agency claims that around one in 20 apartments in Central and West London remain empty, suggesting property investors may be purposefully leaving such apartments without tenants, in order to sell them in outstanding condition within a couple of years. With 89% of all new builds in London being apartments, 13% were sold to overseas clients between 2014 and 2016. Looking solely at central London’s prime market areas over the same period, we observe that this figure rises to 36%, signifying that London continues to be viewed as an attractive investment by international buyers, which is largely due to the weakness of the pound.

Overall, with exceeding supply of luxury residential property in the capital and many more residential towers in the pipeline, the current environment is ideal for both individual and bulk purchases, given the low prices and additional discounts supporting the offer. Profitable strategies may include setting up portfolios of rented homes for large-scale investors, especially when using bridging finance to complete the purchase. With bridging loans being based on the value of the property, rather than the purchase price, buying distressed property under value would enable the lender to obtain 100% of the purchase price, thus fully covering the payment with the bridging loan.