Interest Soaring in London Land

Competition for land in London is hitting pre-recession levels, as international investors prepare to inject more than £5 billion ($8 billion) into the city’s lucrative residential property market.

Sharon Lorimer

The money, more than £1 billion of which has been raised since the start of the year, will target high-end developments and could lead to the construction of about 10,000 homes in the capital. The wave of interest is causing land prices to soar, as the investors bid aggressively for new sites, according to the companies operating in the capital’s already congested housebuilding market.

That money just wasn’t there before the beginning of the year and has really started to appear as people move from protection to investment mode,” said Rob Perrins, chief executive of Berkeley Group, London’s largest housebuilder.

“The upshot is that we are now seeing a lot more of these people at land auctions and it is pushing up the cost of getting hold of sites which already have planning consent and can be developed quickly.”

London is particularly attractive to investors because its property market has been relatively insulated from the pressures felt elsewhere in the UK on the back of the government austerity measures.

Rents have grown strongly in the past year on solid tenant demand, although this rise has recently tailed off.

Even so, it is forecast that as many as one in five households will live in privately rented accommodation by 2015, an increase from one in seven at present.

The challenge for investors is to find developers with the capacity to build enough to create economies of scale in a relatively low-yielding asset class. One strategy has been to focus on the niche, high-end residential sector, where supply is short and demand from overseas buyers high.

Carlyle, the private equity group, last year agreed to buy and fund the development of a new block of prime residences in Chelsea, which is expected to be the first of several such deals.

Mr Perrins said his company, had not been approached as a development partner. However, other London-based housebuilders have entered into ventures.

Aviva, the insurance group, last year teamed up with east-London developer Telford as part of a bid to create a £1 billion portfolio of new-build rental apartments.

Barratt, the UK’s largest housebuilder by volume, last week said it was keen to find a partner to build up a rental portfolio.

As well as the £5.3bn targeting London, investors have raised £2.2 billion to set up residential developments in other parts of the UK, according to new research published by CB Richard Ellis, the world’s largest property services group.

“The total level of interest from investors in the UK residential market relative to the overall level of investment and development is clearly significant, but pinpointing the investors that are ready to commit and at what cost of capital is the key,” said Chris Lacey, executive director at CB Richard Ellis.