Residential developers could fall off cliff

Copyright: David Lawson – appeared Property Week July 1998
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Donald Duck has returned to haunt central London investors. Ten years ago commercial developers imitated his  talent for racing headlong off a cliff and remaining suspended in thin air. Then  gravity took over.  Residential developers could now face the same threat. Geoff Marsh, who forecast the Eighties office slump, is detecting similarities as  almost 200 new homes a week come out of the ground  just as demand could be weakening.

  He is not an isolated voice. FPDSavills has downgraded predictions for UK house prices next year  and forecast a 'dramatic slowdown' in the rate of increases in prime markets like central London.  Everyone is being careful not to frighten investors with forecasts of disaster. 'We are not prophets of doom,' says  City residential specialist  Hurford Salvi Carr. Over-optimistic asking prices rather than achieved values are threatened. But the firm reports lack of interest in property in the 200,000-300,000 pound range - which makes up two-thirds of the City and Midtown market.

  Marsh is quick  to accentuate the positive in the series of seminars for investors  being held by his firm, London Residential Research. 'There is good news around,' he says.  While supply has soared 20%, almost 90% of the near-3,000 central London homes completed in the last six months have been sold. Two-thirds of stock coming on-stream by the end of the year is also taken. Some 40% of the 7,000 properties due next year are reserved.  And all this is happening at a time when Far-east buyers have disappeared. 

  'But just because something is sold is not the end of the story,' says Marsh. Property can bounce back on the market, cutting the ground from under builders and investors. There may be UK buyers to fill the vacuum - but at what price?  The rich, who tend to have a sharp nose  for economic trends,  could be pointing the way to the rest of us. There are 60 homes worth 1m pounds or more lying unsold across central London.

 Marsh is confident  that residential investment is a good long-term bet. FPD Savills also says the fundamentals of the mainstream owner-occupied sector  across the UK is also 'not that gloomy'. In the short-term, however, the market could see more pain than gain.

  FPDSavills' hopes for next year were derailed by dissolving economic optimism as manufacturing industry declines, interest rates rise, leading to weaker consumer confidence. Even strong  fundamentals are impotent under such conditions. UK prices have risen 21% in two years; they will continue to rise by 9% this year but slow to half that in 1999, says the consultant's latest Residential Research Bulletin. Prime  London values have soared 98% since 1992; they will choke back to a 4% rise this year and the same next year if there is a 'moderately hard economic landing.'

 It is the severity of this impact which concerns Marsh. Tony Pidgley of Berkeley Group grabbed headlines with predictions of a soft landing and a recovery next spring. Marsh points out that FPDSavills' figures for capital and income growth over the last decade argue differently.

  'There is an underlying medium and long-term resilience but also the potential for a nasty bump along the way in terms of capital values,' he says.  Yields are  too low at 6-8% to be a good investment when they are not outweighed by  rising prices. The only thing that normally lands softly is a feather - unless it is  on Donald Duck's rump. But the saving factor for investors is that  Donald always gets up again after a fall.