By Khairie Hisyam
A challenging market proves a difficult question insofar as to how the road ahead looks for Battersea. Can the project prove it is more than just a reflection of one man’s charismatic property prowess as the London property outlook dims?
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As the Battersea Power Station (BPS) redevelopment project forges ahead without charismatic chairman Liew Kee Sin, the road ahead is uncertain.
The London luxury property market is slowing down. Foreign buying interest wanes amidst turbulence vis-a-vis currency exchange rate and already-high prices. And even as the BPS redevelopment saw a lower take-up rate for its third phase compared to phenomenal responses to the first two phases, it is now in direct competition with Liew itself and other developments in the area.
However, there is more to the redevelopment project than Liew’s larger-than-life presence, which may provide some comfort to anxious stakeholders. In any event, the 15-year time frame of the project means it would have been unlikely that he would stay till the very end in the first place.
While it may be too early to say the project can sustain its exceptional early momentum without the man, it may be foolhardy to predict total disaster hereon either.
That said, recent conversations KINIBIZ had with sources close to shareholders suggest there are some jitters regardless.
‘Future is bright’
Rob Tincknell
The mood certainly seems upbeat over in UK operations as far as the project goes. According to Rob Tincknell, chief executive officer (CEO) at the Battersea Power Station Development Co (BPSDC), the future “is very bright for BPS”.
“We have robust strategic management plans in place for all aspects of the project and the strongest possible set of unique selling points that set us apart from other developments,” Tincknell said to KINIBIZ via email.
The unique selling points referred to by the CEO include design, some 19 acres of managed open space, close proximity to Central London and Chelsea on top of a nearby new zone 1 underground station, as well as the quality of architecture at the project.
The latter point is underscored by the collaboration between Frank Gehry’s Gehry Partners and Foster + Partners for Phase 3. Gehry Partners will design the buildings to the east of a high street called The Electric Boulevard, while Foster + Partners will design buildings to the west.
Phase 3 will be built by Bouygues UK – which is part of the larger Bouygues Group operating across 80 countries worldwide – who signed a GBP1 billion (RM6.68 billion at current exchange rate) construction contract mid-September, said BPSDC. Works in the northern half of Phase 3 are expected to start early 2016, while the southern half is expected to begin works in 2018, concluding in 2019 and 2020 respectively.
In addition, the overall redevelopment project is slated to have over 43% as commercial space component, including both large retail and office components for which demand remains extremely strong, said the company. “All these make us very confident about the future,” said Tincknell further.
At present, the redevelopment project is close to confirming a range of commercial tenants, sources said to KINIBIZ, who added things remain “business as usual” for UK operations despite rising issues over Liew’s conflict of interest.
Competitive edge
While the market for London luxury homes as a whole seems to be slowing down, a counter-argument may be that not all segments are equally affected. In turn, the spotlight will be on the BPS redevelopment’s competitive edge against the overall market.
Nine Elms, the district in which the project is located, remains a hotspot this year and likely so going forward despite already-robust price growth over recent years, according to Knight Frank LLP earlier this year.
“The scale of regeneration taking place in Nine Elms is vast,” said Knight Frank in a report released in April 2015. “While price growth has been robust (since 2011), we believe there is potential for further outperformance as new schemes come to market and improvements to the public realm are delivered.”
The research house further tipped current valuations of GBP1,100-GBP1,400 per square foot (psf) to rise up to GBP1,800 psf by 2018 in its report.
In particular, real estate data provider Lonres is positive on Battersea’s prospects, citing a value gap between properties at Battersea and those in prime central London area.
“Average values in Battersea are still comfortably below prime central London and the wide range of properties available makes it popular with both owner-occupiers and investors alike,” said Lonres in a review of the project published in May this year.
According to Lonres, crossing the River Thames over to Battersea yields homebuyers roughly a 24% discount in house prices as at the time of review and it added that Wandsworth, the borough in which Battersea is located, is the third most popular borough for those moving outside of Central London.
“The difference in values between prime central London and Battersea is resulting in increasing numbers of buyers crossing the river to look for property,” said Lonres. “Despite the high levels of construction activity, in the last five years, just 3.4% has been added to the borough’s private housing stock.”
Despite values in Wandsworth catching up to London, rising 12.4% annually at last count compared to 5.3% annual growth in Kensington and Chelsea, there is still a gap as seen in a 55% lower property price on average in Wandsworth compared to Kensington and Chelsea, Lonres said further.
For investors, Lonres said the discount in rental value for Battersea flats between 2009 and 2014 has averaged 21.7% compared to prime central London, while the weekly rental cost of a house in prime central London is over three times higher than that in Battersea over the same time period.
While surprising property tax measures in December and the May elections had dampened the market somewhat, Lonres said there has been a consistent trend for transaction volume surges after elections and the Conservative Party win should provide some stability for the market as well as “an increase in liquidity”.
“Looking further ahead, Wandsworth should continue to benefit from significant infrastructure improvements and the substantial discount in property values when compared to prime central London,” said Lonres.
Hotspot cooling?
However, a potential issue is managing the delivery of completed units in the large-scale regeneration area of Nine Elms as the way phasing is done would affect pricing, Knight Frank cautioned. In other words, the volume may easily lend itself to a glut if not managed properly.
According to a Bloomberg report in September, some 18,000 homes are planned in Nine Elms with 4,000 of those coming from Battersea, making it the biggest project in the district.
And there is now concern over the effects of turmoil in global currency markets as the British pound has strengthened against a number of currencies this year which in turn increase the costs for overseas buyers to go into UK property market.
To recap, the first two phases of Battersea saw substantial overseas interest – the first phase for instance saw a third of available units taken up by Malaysian buyers, Bloomberg reported. Waning interest from outside of the UK raises questions on future performance for developments which sold units to overseas buyers before construction commenced, such as in the case of the BPS redevelopment.
“Owner-occupiers don’t buy a property now for completion in two years’ time,” said Lonres managing director Anthony Payne to Bloomberg. “The people who’ve bought these properties (in Nine Elms) are gambling on prices rising.”
The implication is future phases may not perform as well without substantial foreign buyers coming in, though how bad this may affect BPS in particular remains to be seen. KINIBIZ understands that up to end-September, around 60% of all homes sold at BPS had been to UK-based buyers.
There are also concerns over the volume of construction ongoing in the district, Bloomberg reported. “We’ve intentionally shied away,” said Homebuilder Redrow Plc chairman Steve Morgan to Bloomberg.
Transaction figures in the overall luxury homes market, in addition, do not bode well so far for the district either.
Bloomberg reported prices of roughly half the homes under construction or newly completed in Nine Elms were reduced before they were sold in 2015, citing information provided by real estate data provider Lonres.
Lonres’ figures also showed nearly 30% of new properties in the district have remained unsold on the market for more than a year, though it did not include sales by developers, Bloomberg reported.
In terms of value, average sales value of all apartments in the district fell by about GBP132,000 to about GBP818,800 in 2015 compared to 2014, said broker Foxtons Plc to Bloomberg.
The slowdown in luxury home sales came as those who had already bought and potential future buyers come to terms with a number of measures announced by Chancellor of the Exchequer George Osborne in December.
Among others, overseas homebuyers now face a higher capital gains tax, while UK’s wealthiest landlords will see reduced interest relief on rentals beginning April 2017.
Moving beyond Liew
Market conditions and challenges aside, the question on observers’ minds would be how BPS redevelopment pushes on without Liew and whether the momentum would remain without the boost he would bring to the project.
It is unlikely he would have remained to the end of the 15-year development time frame in 2025 regardless. This in turn adds to the consolation for shareholders that the fourth phase onwards would be “pure profit to the owners”.
“By starting Phase 1, Phase 2 and Phase 3, our cash flow would be able to service our debts – that means our land costs, our infrastructure costs. So when come Phase 3, we will slow down our sales,” said Liew to business radio station BFM in September 2014. “Because there’s no hurry to sell anymore. Because we are more than break-even.”
In other words, the task ahead insofar as the execution of the redevelopment remains only to maximise profit – the first hurdle, which is to recoup costs and go into some profitability, appears to be largely accomplished. This lessens the difficulty somewhat for the shareholders after Liew left.
On the other side of the consideration, though, is how significant the loss of Liew’s reputable vision as a developer as well as how the transfer of his abilities and experience to a directly competing development in Nine Elms would harm BPS redevelopment.
It would be early days to tell now. Amidst an uncertain road ahead, the immediate spotlight will be on the phase rollout at Battersea, which is currently up for consideration by planning authorities following submission of proposals to the Wandsworth Borough Council this year.
Pending potential changes from authorities, Phase 4a is slated to include 374 affordable homes as well as commercial space for businesses and a new public health facility.
In the longer term, the ultimate question is whether BPS will be able to prove it is bigger than one man’s presence, even as his shadow remains looming large in Nine Elms as he leads the charge of a competing development.
And in the process, stakeholders may eventually discover tell-tale signs why shareholders, despite the man’s self-admitted conflicts, had been so reluctant to show him the door early.
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