November 16, 2016

The Only Way To Sell, Or They Will Lose More

A report from Bloomberg on the UK. “Land values in central London’s best districts fell 10.3 percent in the year through September, the biggest drop in at least five years, as higher taxes and the Brexit vote caused luxury home prices to decline. Banks are less willing to lend for site acquisitions and construction, fueling the decline in values, broker Knight Frank LLP said in a report. Developers are also paying less for land because they need to raise their profit margins as a buffer against any further falls in home prices, the broker said.”

“The number of unsold central-London homes under construction will reach a record high this year, increasing the risk that developers’ bets on rising demand for luxury properties will go sour. Shares of property developers with large projects in the U.K. capital’s best districts have lagged competitors since the referendum after they began to write down the value of their holdings on falling sale prices.”

“The number of unsold homes under construction in the U.K. capital’s best districts will hit almost 11,000 this year, according to data compiled by Molior London. Selling high-end homes in London remains ‘challenging’ because of market conditions, Barratt Developments Plc said in an earnings statement.”

From Mansion Global on Turkey. “Political unrest in recent months and an oversaturated market have stifled Turkey’s once blossoming residential real industry that saw years of development and foreign investment. ‘We see a slowdown and even in some cases a freeze in sale prices of new projects,’ said Kerim Bertrand, the country manager for Turkey from REIDIN, a real estate research firm.”

“According to the Turkish government, real estate sales to foreigners totaled $2.64 billion in 2012. Year on year growth in that period also boomed: 2013 house sales exceeded 2012 levels by 65%, according to the consulting firm Deloitte. And Turkey topped the list of countries in Knight Frank’s Global House Price Index for four consecutive quarters. Home prices grew by 15% in the first three months of 2016 compared with the same period in 2015, Knight Frank reported.”

“‘İstanbul turned into a construction site, particularly in the last 10 years,’ Mr. Bertrand said.”

“The city grew from both public and private investment, according to Ozlem Atalay, a researcher at Pamir & Soyuer. In Istanbul, the private luxury market, in particular, was blossoming to the point of oversaturation. Buildable land in the city is extremely limited, so to cover the cost of construction, developers skewed to the high end. Savvy buyers may be the ones to benefit. ‘2017 will be probably a hard year as much as 2016, due to both domestic turmoils and global context,’ said Ms. Atalay. ‘Foreign demand for property has been down by at least 20% on 2015. It will be a buyers’ market.’”

The Economic Times in India. “With the government’s clampdown on black money, property brokers have started getting calls from their clients to keep their deals on hold, at least for now. Investors, who meant to close their deals with the cash component, would much rather wait now, given the uncertainty.”

“‘It’s obvious that the deals structured earlier with the cash component will not go through now. Some buyers are asking sellers to accept old notes, but sellers aren’t ready for this and are now asking the entire payment to be made in cheques. A lot of deals have been put on hold and many may also get cancelled,’ said Yashwant Dalal, president, Estate Agents Association of India.”

“What’s worse, any hope of a demand resurgence has been dampened now with the currency ban. While primary residential markets that depend on end users may not take a big knock, secondary residential sales that rely heavily on black money is likely to be severely affected.”

“‘There will be a price correction in the secondary market in the coming quarters due to the liquidity crunch, leading to price correction in the primary market. The real estate sector is headed for tough times with transactions drying up. Over the next six to nine months, we will see a significant impact on the sector as people recalculate their savings,’ said Nishant Singhal, director-strategy, Investors Clinic.”

The Global Times on China. “When commodities are associated with coupons, it reminds older Chinese of a time when food and other goods were scarce in China - so scarce that the government issued ration coupons, such as ‘rice tickets,’ to cope with the shortage of material goods and to encourage frugality.”

“‘But a scarcity of housing was the last thing the government of Erdos, North China’s Inner Mongolia Autonomous Region, was worrying about when it rolled out a housing coupon system this April. The local government hopes that transforming part of its huge inventory of unoccupied housing into ‘fangpiao,’ literally ‘housing tickets,’ will help reduce their massive glut of unsold homes.”

“Data from China’s statistical authorities showed that the country had an unsold housing inventory equivalent to 709 million square meters by the end of August, only 9.8 million less than at the end of last year. Most of the sales occurred in first- and second-tier cities, as demand remains low elsewhere. ‘Housing coupons are, in nature, a type of cash compensation which aim to help the city digest its housing oversupply,’ Li Jingguo, a professor at the Institute for Urban and Environmental Studies at the Chinese Academy of Social Sciences, told the Global Times.”

“Many real estate developers have asked to be included in the government housing coupon system, even though this means their property will be sold at a lower price. ‘The price offered by the government is relatively low, but still, most of the owners of the 80-odd real estate projects now on our platform came to us first, as they know the government platform is the only way for them to sell their inventories. Or they will lose more,’ Geng Tao, an official at Dongsheng’s housing and land exchange certificate management center, told”

“Li Chun, CEO of Inner Mongolia’s Zhengyuan Real Estate Company, thinks the system is a good idea. Li currently has three unfinished real estate projects in Erdos, all of which have been stalled for four years. He also hopes his projects can be included in the government platform. ‘We will earn no profits with the price that the government offers us. But it’s good enough to get rid of the stocks,’ he said.”

“But the circulability of these coupons have also given rise to agents and speculators who buy the coupons up at a relatively lower price, and sell them at a higher price. Because housing coupons have limits in terms of the housing projects they can be used on, owners of coupons usually try to sell them at a lower price.”

“Wang Rui, a real estate agent, has invested 1.8 million yuan in buying cheap housing coupons from buyers, according to DragonTV. ‘Even though the price of housing coupons are dropping, the government won’t allow it to drop too low because then people won’t agree to be relocated,’ he told the news channel.”

Sellers Are Scrambling To Offload Their Real Estate

A report from the Orlando Sentinel in Florida. “Orlando neighborhoods saw a continued decline in for-sale signs last month, driving greater competition among buyers and holding prices steady at time of year when they usually soften, a new report shows. Debra Wingo, broker for the Selby Group, said rates have risen in the last week. She said an Orlando couple was shopping for houses as rates went from 3.5 percent to 4 percent in recent weeks, capping her buyers at $250,000. ‘A half point does make such a difference, especially for first-time buyers,’ Wingo said. ‘We thought we could go $265,000 to $270,000.’”

From MarketWatch on Texas. “I had to have one of the most difficult discussions a Realtor can have with his seller client last week. The conversation about reducing the price of their home and the discussion about the market leveling off and potentially dropping soon. I knew a turn in Dallas real estate was coming, but no seller wants to hear it. Some of the telltale signs were the emails at the end of September and the beginning of October from builders offering 5% commission if one of our buyers purchased their new builds. Normally it is 3%, or 4% if they are getting desperate.”

“The Texas Association of Realtors released its statewide Quarterly Housing Report, which stated there is a ‘cool off’ from the 5-year boom. If you watch any of the ‘Million Dollar Listings’ shows you will hear the same complaint. There is too much new construction and with too much supply, the prices drop. This oversupply is only true for high-end, new construction builds but this is a microcosm of a macrocosm. This is the beginning of a slow down.”

“A buyer’s market is looming and sellers are scrambling to offload their real estate before the buyer’s market becomes a reality. Conservative, long-term investors have been sidelined for years because capitalization rates were 5% or even less. It has been impossible to stomach the $1 million apartment complex that only brings in $30,000 after all expenses are paid. And yet, this is what is available in the current market. Buyers are starting to put their foot down because they are no longer worried about 6 other offers flying in.”

From Crain’s Chicago Business in Illinois. “As new luxury apartment towers in downtown Chicago fill up, they’re doing it at the expense of their older competitors. Landlords are starting to feel the impact of an historic building boom that is adding thousands of apartments to the downtown market. The occupancy rate at Class A buildings fell to 92.2 percent in the quarter, down from 94.8 percent in the second quarter and 93.7 percent in third-quarter 2015, according to the report. The Class A occupancy rate, which does not include buildings in their lease-up phase, hasn’t been that low since late 2009.”

“Downtown landlords may need to get used to a weaker market over the next couple of years as supply exceeds demand. Developers will complete a record 3,830 apartments in downtown Chicago this year; another 4,500 in 2017; followed by 4,200 in 2018, according to Appraisal Research. That represents a 39 percent increase in the number of downtown apartments. ‘Where we’re at right now is not surprising,’ said Appraisal Research Vice President Ron DeVries. ‘Next year is going to be a tough year. There are a lot of units coming online.’”

The Los Angeles Times on California. “With home prices and rents rising in Southern California, developers are busy building houses, condos and apartments – particularly in downtown Los Angeles, where a residential building boom is underway. So what does an unexpected Trump presidency mean for the housing market? Major cities across the country, particularly Los Angeles, are experiencing a building boom in their downtown areas — a construction wave that has primarily been focused on rental housing.”

“It’s been driven by an improving economy in those cities, low interest rates and the declining rate of home ownership. In downtown Los Angeles, there are more than 6,000 apartments under construction.”

“To the extent Trump’s policies help economic growth, the commercial real estate market will benefit, even if interest rates rise, said Stuart Gabriel, director of UCLA’s Ziman Center for Real Estate. But even before the election and the talk of easing the regulatory burden, real estate observers were starting to question how long the current construction boom in cities, including Los Angeles, could last given the pace of development. ‘Some of those markets may be coming close to overbuilt,’ Gabriel said.”

The Real Deal on New York. “It’s been a quiet week when it comes to discounts on Manhattan’s most expensive properties. The biggest price chop was at a co-op unit at the Carlyle Hotel. The four-bedroom apartment, which features enviable views of Central Park and Manhattan, was reduced from $19.7 million to $17.9 million, a discount of 9 percent. This Carlye Hotel co-op was first listed in April last year for $22.5 million. But it didn’t sell, and five months later it was removed from the market. The apartment was relisted in January for $19.7 million, but was taken down again in August. Last week, it reappeared on the market, this time with a slightly more subdued asking price of $17.9 million.”

“48 West 85th Street - Previous Price: $13 million, current Price: $12.2 million ($1,584 per square foot). Percentage Drop: 6 percent. Built in 1886 for the Lehman banking family, this townhouse has 16 rooms across 7,700 square feet. The property was first listed in September for $13 million, but was reduced by 9 percent last week.”

“George Vanderploeg, Steffen Kral and Charles Vanderploeg of Douglas Elliman have the listing. ‘We tested market briefly at the $13 million mark. We thought it was a little high but we wanted to make sure,’ George Vanderploeg told The Real Deal. ‘It’s like fishing, you change the bait once in awhile. It bugs me when brokers and owners don’t test the market, and they end up underselling the property.’”