City or Casino?

Published: by Catharine Banks

We’ve talked before about the problems facing London’s luxury new-build market. Sales are slowing down, market values are falling, and investors are starting to pull out of schemes across the city. And if we are heading towards a major bust, the ramifications could be dire – not just in London but across the country.

But the London new-build market is notoriously complex. So much of what is known about it is anecdotal, based on clandestine conversations with developers and investors, or snippets of data. And a huge factor within this is off-plan sales.

Off-plan sales are, most simply, where a developer secures a sale for a property before they have finished building it – and possibly before construction of the property has even begun.

Once planning permission is granted for a development, the developer will market the units they are planning to build. Buyers can secure a (still to be built) property with a deposit – usually between 10-30% of the total asking price. This means the buyer has locked in the price they will pay at today’s values, and they can wait until the development nears completion before securing a mortgage and completing the purchase. Some buyers like this, as it gives them flexibility: they lock in a price at an early stage and they often have the option to change the specifications and finishes on their new home. It is also useful to developers: the process provides them with cash towards the beginning of construction, without which the scheme might not be viable.

What’s not to love? Developers get the funding they need, the buyer gets some flexibility, and in the end, a home gets built. But funnily enough, it’s not as simple as that. Few ordinary home buyers can go down the off-plan purchase route, as it requires having a lot of spare cash, and being able to wait years before actually moving in. Off-plan sales are therefore most attractive to speculative investors – and it is these buyers that we really need to know more about.

Often, several years can elapse between the agreement of an off-plan contract and the completion of construction. And if property prices have continued to rise (as they have in recent years), a canny buyer can sell on their contract during this period, at its higher value – and pocket the house price growth as a tidy profit. This isn’t news to investors. ‘Flipping’, as it’s often called, was prevalent around the globe before the last recession.

Our new analysis of a selection of off-plan sales and resales in the capital, released today, shows that in London’s booming new-build business, flipping is back with a bang. We found examples of flipping on some of the biggest high-end developments in London. We also found it on some smaller housing developments in less expensive locations – showing that the homes average families so desperately need are being bought and sold by people looking to use our housing shortage to make a quick profit.

The presence of lots of speculative money in London’s housing market can cause real problems: when it’s flooding in it pushes up prices for everyone. And in a falling market, if speculative investors realise prices are starting to drop, they can easily withdraw and try to sell en masse – flooding the market and risking a major crash that could damage the ability of developers to build the homes we need. Lots of speculation tends to make markets more prone to booms and busts – which is the last thing London needs.

Even worse, it’s impossible to know how much of a risk this might be – because no-one really knows how much flipping is going on. There’s no requirement to register off-plan sales or re-sales at the Land Registry, as the homes are not yet physically there. The developers know who they originally sold a contract for one of their properties to, but they might not know if – or to whom – it’s been re-sold since. And there’s certainly no central oversight of these kinds of transactions, unlike traditional property sales.

As recent news stories have highlighted, there are lots of reasons why improving the transparency of property ownership and trading is important. A robust and transparent system of recording and monitoring ownership is vital for the development industry and the housing market to function properly. It’s essential to prevent corrupt cash finding its way into the system. And public authorities and researchers need reliable information to understand market trends and plan properly for the future. At the moment, off-plan transactions are slipping through the net, leaving a worrying gap in everyone’s understanding of the market. We’re particularly concerned that this could mean planning authorities missing out on affordable housing contributions that might otherwise have been secured through S106 contributions.

It wouldn’t be difficult or unprecedented to set up a system which records these off-plan sales and re-sales; Dubai has established exactly this kind of system as an off-shoot of their Land Department. Developers register off-plan properties and buyers of the contracts certificate their purchase through the online portal. There’s no reason we couldn’t do that here.

As well as the concerns we have about what these shadowy transactions could mean for our housing market, there’s also a simple moral question here. When over half of London renters are struggling to afford their housing costs, is it right that investors are treating London’s new-build market like a high-stakes casino? This is why we’ve asked the Mayoral candidates to ensure their housing policies prioritise homes for Londoners on low and average incomes.

Our analysis suggests that flipping is happening – and that it’s risky for London. That’s why we’re calling on the next Mayor of London to take sensible steps to regularise and monitor this area of the market. Only then will we know exactly how this practice is influencing the wider housing market – and whether we need to take steps to regulate it.