Is Liverpool’s City Centre building development one big Ponzi scheme?

Norfolk Street

Regrettably, I believe that this failed development in Norfolk Street will be one of many when Liverpool’s speculative property boom turns to bust

Over the past few months I have been inundated with e-mails from around the world relating to failed or poor residential investments in Liverpool.

Let me summarise just one for you. In 2007 a Middle East investor bought a one bedroomed apartment in what I regard as one of the best new apartment blocks in Liverpool. He bought it as an investment for £140,000. He put it up for sale at the beginning of 2017 for £110,000. In the autumn he sold it for £90,000. Not only did he lose a huge amount on the capital side but it was let for just over 6 years meaning he had no income but a range of charges to meet over a large part of that period.

Let me give you another one. More than 40 student units were sold to investors from around the world including many in this Country. They have been unlettable for more than 4 years because the developer made changes to the water system and emergency escapes that meant that the building was rightly closed by the Fire Service on safety grounds. The developers interest in that building has now been transferred to a company in Belize which means that enforcement actions by the council are almost impossible to pursue.

Lastly, let me remind you of the huge problems with 4 developments around the China Town project which have been the subject of legal action where the Council was comprehensively defeated. Those blocks have not been touched for 14/15 months. They are visibly deteriorating and it would seem that whatever the result of the legal action they will never be completed and that investors have lost most if not all of their investment.

The Council wash their hands of all of this and it is true that in most cases they have no direct responsibility. The exceptions being, of course, where they have sold land to hollow special purpose vehicles and joined marketing exercises in the Far East designed to encourage investment from Chinese and Hong Kong investors.

But this Pontius Pilate attitude is not good enough for two reasons.:

Firstly, we are the strategic planning authority. Our record here is disastrous. Our Local Development Framework is 6 years late and the Government is taking enforcement action against us. We don’t even have a City Planning Officer. Having no Framework means that we are enforcing standards and development through a document that was basically approved 15 years ago. There have been huge changes in the market since then.

Secondly, we need to defend our City’s reputation in the medium and long-term. 3 months ago, I asked the Mayor to detail the number of student and general use apartments in the City Centre; how many of them were occupied and how many were as yet unbuilt but for which planning permission had been obtained. This is real information that people need to assess the viability of the market so that they can make informed investment decisions.

I believe that there is already a huge oversupply of property either built or in the system and that there will be a property slump in the near future which will make many lose their investments. Not only is this a local possibility but it is supported by national market moves which are recording some of the lowest levels of house purchases and at minimum an easing of price inflation (which we should all welcome).

Why should this matter to the Council? Because I believe that in the not too distant future we will end up dealing with a lot of incomplete blocks where the money to complete has run out and a lot of complete blocks built to low standards, which will be half empty, causing huge drag on future property development in the city.

When you raise issues like this you are told that it is not our job as a planning committee. The market will sort out issues such as oversupply and will correct. But in this case what is the market? You might assume that the market is the number of people who will want to lease or buy a property. But that is not actually the market in this case. The market is the number of people who can be persuaded by slick marketeers that there is a market of people wanting to buy and lease. Much of this marketing is now being done in the Far and Middle East to people who have never been to Liverpool and never will. They buy, in part, because of the good international reputation of Liverpool.

This matters because of the way that these developments are financed. A traditional building company like Redrow or Barratts buys land, pays for the development, sells the property and makes a profit. It is at their risk.

The City Centre developments are financed by fractional investment. The purchaser of the flat puts money in before completion with only the last 20% waiting for completion when the flat can be occupied. All the risk lies with the investor and not the developer.

So why do I think that the market has reached an artificial peak? I look at two things:

  1. What do we know about the demographics of Liverpool and particularly the youth market which is most likely to want to buy or live in a specialist apartment in the City Centre?

In general terms our population is growing but nowhere near fast enough to take up the number of properties being made available. We know that young people often want to rent somewhere whilst foot loose and fancy free but when they want to settle down and have children they want to buy or rent a house. They leave the City Centre and many of them leave Liverpool because we are still not providing the right accommodation for them.

Student accommodation is even more problematical. No-one thinks that the student population of either Liverpool or the UK as a whole is going to increase. Over the last two years the number of external students wanting to come to the UK has decreased. This is largely caused by Brexit and is unlikely to improve. So, who are we building all these flats for? One of our Young Liberals is living in a new block which is in its second year of letting and which is one third occupied. This is not untypical.

  1. I had a quick look at a national listing site to see what the market is telling us. I found no less than 440 one bedroomed flats already available and this is just the tip of the iceberg. I checked just 4 other agents briefly and found dozens of flats which are not on national lists. I don’t know how many 1 bed flats there are but I am sure it is in the thousands.

I also looked at Rightmove and saw that they are predicting a 1% rise in property values nationally over 2018. Of course, some areas, some properties will do better than this and some will do worse. But there is no indication that Liverpool will manage to dodge the adverse head winds for property values.

I then looked at what the marketeers are saying about developments in Liverpool. I got from a London agent details on one very large property which is yet to be built or even started. They claimed that it has planning permission but I checked with the Council and it has not yet received planning consent although it has been approved by the planning committee (I voted against it!).

This what the agents are saying about the investment potential for the building:

Capital growth forecasts
3 year investment Scenarios Conservative Expected Bouyant
  3% Pa JLL 7% Pa
Purchase Price  £          124,000  £       124,000  £       124,000
Discount on RICS Valuation  £            31,000  £          31,000  £          31,000
Forecasted capital growth during build  £      19,453.87  £    27,183.00  £    45,867.48
Forecasted capital growth over 3 Year Rental Assurance  £      15,705.42  £    23,201.29  £    38,341.81
Total 7% Net Assured Income over 3 years  £      26,040.00  £    26,040.00  £    26,040.00
Total projected capital growth**  £      66,159.29  £    81,384.29  £  115,209.29
Total combined Income over 3 Years  £      92,199.29  £  107,424.29  £  141,249.29
Value of property after 3 year assurance  £    190,159.29  £ 205,384.29  £ 239,209.29
ROI % 3 years from completion 74.35% 86.63% 113.91%
Annualised NET ROI 14.87% 17.33% 22.78%

 

So, let’s look at these figures in more detail:

  1. An RICS figure is quoted but this is just an estimate of a property’s worth and in this case, it seems to bear no relationship to what similar properties are actually selling for according to prices on national listings. The discount on this valuation is £31,000. An incredible free gift from the developer!!
  2. It quotes a rental assurance with no clear view of who is giving that assurance. The money is not held within a secure account like an escrow account. It is held within a specially created vehicle. It may have no value at all.
  3. It quotes a ‘conservative’ increase in values of 3% which is against all the advice on likely property returns for 2018 and beyond.
  4. It makes no allowance for the fact that the secondary sale of these properties normally appears to be below the primary sale price.

In other words, these figures are pure speculation although they appear to be the results of scientific research!

So, what do I recommend?

That people should continue to look at investing in properties in Liverpool. There are good potential areas and there are bargains to be had but:

  1. The good opportunities will be marketed by local agents and not ones in London. SO, BUY FROM A LIVERPOOL BASED AGENT WHO UNDERSTANDS THE LIVERPOOL MARKET.
  2. Do not use the solicitor recommended by the developer. Again, come to Liverpool and find a local solicitor who you know will only be interested in your welfare and has no ongoing relationship with the developer.
  3. Whatever you do come to Liverpool and see the market for yourself. If you are thinking of investing your pension or other long-term savings you need to do your own research and not rely on the ‘research’ of those whose job is to flog you something for short-term gain.

This is a longer blog than I normally produce because this is an incredibly complex subject. There will be those, especially in the Labour Party and among the developers, who will say that I am damaging Liverpool by raising these concerns. If so they can challenge them. The Council has the reach and the ability to do its own research to either prove or disprove what I say here – but it chooses not to do so.

I believe that within a decade this property boom which will have turned to bust will create a major problem for the physical fabric of the City. I believe that it is my duty to raise these concerns and flush out the full facts about property development in the City.

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About richardkemp

Leader of the Liberal Democrats in Liverpool. Deputy Chair and Lib Dem Spokesperson on the LGA Community Wellbeing Board. Married to the lovely Cllr Erica Kemp CBE with three children and four grandchildren.
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3 Responses to Is Liverpool’s City Centre building development one big Ponzi scheme?

  1. I did Tweet a response. But after digesting your interesting blog, I had a ‘light bulb’ moment.
    I suddenly realised why our reputable!? RSL, here at the Muirhead Avenue shared ownership complex, are desperate to buy back the SO apartments and turn the whole complex into the Private Rental Sector. Out of the original 22 SO apartments their are still 9 of us left who won’t sell back to the RSL for the pittance they offer. This place, refurbished ex LCC flats was opened in 2006, trumpeted as Liverpools lovingly restored SO scheme.
    The interesting point, when they do buyback, they completely strip out the apartment and take Three!! weeks refitting it out.
    So after reading your Blog, I realised, as we have suspected for years. If someone came to independently came to buy from us, because we know what a ripoff this place is, we would definitely make sure they paid for the top survey be carried out. We could then point out the problems here. So the RSL buyback, rent them out, no one will find out.
    Thanks for the Blog

  2. Tim says:

    Very good analysis of the Liverpool city housing market.
    To think that developers are putting out such misleading marketing information.
    Your advice to would be buyers would be we’ll heeded!

  3. Paul says:

    Excellent blog Richard

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