Wealthy individuals and families from around the world have long seen high end apartments in the world’s most economically vibrant cities as ideal investment properties. And from London to New York, L.A., Sydney, Vancouver and Singapore, developers started to build luxury apartment blocks targeting exactly that kind of buyer.
It has been a successful model since the recovery from the international economic crisis ten years ago. And even before. Apartments in luxury developments in expensive cities with a history of stable economies and government is seen as an ideal choice as a store of wealth. These investment properties have a good record of strong capital appreciation even if the buyers decide not to go to the trouble of renting their investment properties out for regular income. Their main priority is often a safe place to park cash with confidence capital appreciation alone will justify the investment over the long term.
With that in mind, many of these buyers opt for investment properties when they are still ‘off plan’ – during construction. Sales agents promote the theory that buying in this way, which often involves putting down a sizeable deposit, means realising an immediate 10%-20% rise in an investment property’s value on completion.
That has often tended to be the case. But in recent times developers directly targeting the international wealthy seem to have overstepped the mark. Quoted in the Financial Times, Andy Yan, a Vancouver-based academic and planner commented:
“Global capital entering local real estate markets is not particularly new, but what was new was the intensity with which it entered places like Vancouver, New York, London, Melbourne and Sydney.”
Agents, both smaller, local operations targeting international buyers, and big international brands like Savills, gleefully encouraged investors with optimistic market outlooks. A 2016 Savills report forecast growth reaching 21.5% by 2020 in prime central London. In fact, in 2019, prices are down over 10% since 2016 levels. And many international investors, often buying properties for high six figure sums or over £1 million, have been burned.
The same FT article gives an example of a wealth Indian entrepreneur who agreed to pay £1.4 million for a 3-bedroom apartment on the south side of the Thames. He was convinced to put down a sizeable deposit by agents predicting its value would gain 15% by the time construction was complete. However, with construction almost complete, a mortgage lender valued the property at 20% less than what the investor paid for it.
The problem is that many of the luxury apartment developments targeting foreign investors were selling out to only wealthy foreign investors. This has led to many agents and developers setting premium prices that are decoupled from the real market. And demand has started to dry up, leaving this artificial market exposed. Investors have started to examine the prices they are being quoted more carefully and benchmarking against the wider local market and realising they are being overcharged.
At the same time, local governments have started to act as a result of the influx of wealthy foreign investors pushing up prices across the market. From New Zealand to the UK and the USA, new taxes are being levied against foreign buyers. Authorities are also looking more closely at the source of money being used to buy property.
The combined result has been a slump in prime property prices across much of the world. There may even be a more negative legacy. Peter Rees, professor of city planning at the Bartlett faculty of the built environment at University College London, has warned that the Thames could be “lined with derelict towers” in a century’s time, as service charges prove inadequate for replacing glass façades and elevators, which have a limited life.
The lesson is that apartments in buildings with swimming pools, SPAs and concierges might look good in a brochure. But how many residents are really willing to pay a fortune in service charges each month for the privilege? Nowhere near as many as have been built in the world’s premier cities.