London Lenders Rejecting Homebuilders as Cost of Land Soars
“The biggest reason we turn down deals is because land values are a bit toppy,” said Randeesh Sandhu, chief executive officer of London-based lender Urban Exposure Group. “Usually the only way a developer can get the deal to work is to go back to the landowner and renegotiate the purchase price,” said Sandhu, whose company rejects 98 percent of approaches for credit on predominantly residential projects.
Central London residential land prices jumped about 26 percent in the 12 months through March, according to data compiled by broker Savills Plc (SVS), as government-backed loan programs for new homes and rising sales fueled demand for undeveloped sites. Land for offices there rose 4.4 percent in the same period. London homes, valued at about 30 percent more than the market’s last peak in 2007, are appreciating at a slower pace as more sellers offer properties and demand ebbs, property-website operator Rightmove Plc said in a June report.
“We do see people potentially overpaying for land,” said Chris Philp, chief executive officer of Pluto Finance, which specializes in providing high loan-to-value credit for housing construction. “There’s a shortage of land with planning consent to build on and that’s obviously feeding into higher house prices and higher land prices” in London, he said.
Housing plots in the U.K. capital now cost 27 percent more than they did in 2007, London-based Savills said in a May report. Value gains have also spread to northern England, traditionally the U.K’s most volatile housing market, where prices for plots of land not previously developed jumped 8.1 percent during the first quarter, the most in the country.
“The most difficult thing is the developers finding feasible deals at the moment, particularly in London,” said James Thomlinson, founding partner of Voltaire Financial, which provides loans from 1 million pounds ($1.7 million) to 15 million pounds for residential development. “A lot of people have been focusing on converting offices to homes and there just aren’t that many office buildings with a feasible scope that you can convert anymore.”
London developers’ profit margins are also being squeezed by rising construction costs as employment in the industry rises at a record pace. Building contractors are in such demand that they’re able to choose which companies they work for, and often stick with the same developers, said Mark Farmer, head of residential advisory at consulting firm EC Harris LLP.
“That automatically puts new entrants at a disadvantage,” he said. “Contractors are looking very long and hard at the opportunity and whether it represents increased risk.”
Some projects are getting no bids from builders, Farmer said. “It’s a very picky market so developers are having to package their projects up to be as attractive as possible to the construction market,” he said.
Developers that are buying buildings to demolish for new projects face stiff competition, pushing up prices, according to Thomlinson.
Asking prices in the city fell 0.5 percent in June as “affordability and common sense get stretched too far,” according to Rightmove. Value gains in London are now expected to be less than 5 percent a year for the next five years underperforming the wider U.K. market, according to a May survey by Royal Institution of Chartered Surveyors. Price gains of 9 percent a year through 2019 had been predicted for London in March, RICS said.
Lloyds Banking Group Plc plans to avoid funding the development of London luxury-home projects, John Feeney, the lender’s head of corporate real estate, said in March. The bank, Britain’s biggest mortgage lender, will extend credit to builders that have already sold some of the homes before construction is completed in other residential projects, he said.
Pluto Finance, which raised 94 million pounds in April from investors including a fund managed by Blackstone Group LP, is avoiding lending for projects in central London’s best districts, Philp said. The average price paid for a home in Westminster, which includes Mayfair and St. James’s, fell 2.9 percent to 1.19 million pounds in April, according to data compiled by research firm Acadata Ltd.
“It’s very dependent on foreign money, which is potentially fickle, particularly if there are tax changes,” Philp said.
Urban Exposure Group and its venture partners have advanced 476 million pounds to mainly residential construction projects in the U.K. in the last 12 months. Urban Exposure Real Estate, a new unit, plans to raise 500 million pounds to lend to homebuilders through an initial public offering, according to Sandhu.
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