A little while ago, whilst at a Regeneration Conference, I told a journalist that I could see many of the residential towers built and being built in London; marketed at overseas investors, ending up losing a lot of their value and even ending up as problem places which house people for which these places don’t really work as homes.
This shouldn’t really come as new or revolutionary thinking. Many parts of London have been through cycles of starting off as up market, then being occupied by the poor, and then things going full circle with them now being re-occupied by the wealthy. This may take many years but this churning through different classes of occupiers isn’t anything new so isn’t fantasy thinking, but I wasn’t believed. I pointed out that this downfall of resi-towers designed as investments for overseas investors may take, say, 20 to 30 years, but I could see it happening to those which are not on top-notch prime London sites but are in the more secondary sites which are now being brought forward and developed. The few mega-prime developments are likely to be relatively safe but not many of the others.
My thinking is based on the possibility that it only needs a shock to the home economies of these overseas investors for many of them to need to liquidate their London property assets quickly for values and sales prices to fall. A big overseas crisis could lead to these falls being quite large due to lack of buyers but the sellers needing liquidity very quickly.
Of course these residential towers may be snapped-up by other overseas investors but can we really expect a lot of investors being brave enough to be tempted in on a falling market? And what happens when the distressed overseas investors who can’t sell fail to pay the hefty annual service charges? Court-cases and repossessions?
Eventually someone will hit on the idea of buying up these empty towers at distressed prices and putting in any sort of tenant at any rent in order to get at least some income in. Or the distressed overseas investors (or their creditors who may have a charge on these properties) will rent out individual units to anyone, at any price, for the same reason. The start of the downward spiral.
Anyway, I was thinking long to medium term but last week I saw an example of just the sort of external shock I was thinking of in the Chinese Stock Market. Reading one of the financial papers I saw that The Shanghai Composite has soared 180 per cent in the last 12 months, and that there are so many individual stock-market investors in China who are investing so much that the casinos on Macau are feeling the pinch – people are using the stock-market as a casino in preference to the actual casinos. But this bubble may have now burst – in the last few weeks the Shanghai Composite fell by 22 per cent before bouncing back and ending June with a 6 per cent drop on the month – now tonight I hear that there has been a 30% stock-market crash in China.
The article I read said that the local Chinese securities regulator banned brokers working with ‘umbrella trusts’ which provide investors with margin funding for stock market speculation, and this may have been the reason for the recent falls (done deliberately to stop the bubble getting to out of hand).
Now, what happens (as is possible, if not highly likely) if these ‘umbrella trusts’ lent investors the money for speculation with the latter’s London properties as security? Can you see the picture I am painting and how my ‘vision’ of London’s mega residential towers suddenly becoming a problem could happen? As free markets tend to excess and over-exuberance this scenario will happen eventually. And who is going to have to pick up the pieces?