NINE ELMS UNDERSTANDING THE VISION

UK Research, September 2016 @JLLUKResi

Misconceptions The Nine Elms riverside location is a Regeneration development at Nine legacy of the Thames’ role in delivering Elms has attracted some negative goods in and out of the Capital, notably attention based on a range of factors. coal to fuel Battersea Power Station, Detractors object to many elements Europe’s largest and once most polluting of the new residential development brick building. Its Grade II listed status taking place on site, such as its scale, means that preservation and reuse, in high prices, international ownership JLL RESIDENTIAL RESEARCH some way, is of national importance. as well as elements of the design itself. ADAM CHALLIS The high costs associated with its Some of the criticisms levelled at Nine repair, decontamination and conversion Elms are valuable challenges to Central Understanding the Vision have confounded several previous London’s largest regeneration area. This It is worth reminding ourselves of the attempts to redevelop the 13 acre site, is the only location in Central London scale of the current transformation which has not been in use for over three that could absorb the development taking place. By 2025, across the whole of decades. The current owners, Malaysian of such a huge volume of new offices, the Nine Elms area, Londoners will see a developer SP Setia and Sime Darby shops, hotels, homes and open space. new high density town in the place of the alongside the Employees Provident However, much of the media comment last large-scale industrial estate in Zone Fund of Malaysia, were able to purchase on weakened price levels and sales 1. In real estate terms, this will include: the site from the Irish Government’s rates – even prior to the Referendum National Asset Management Agency • 20,000 + new homes – has been exaggerated and widely (NAMA). At the time in mid-2012 misinterpreted. To the extent that the • 3.2 M sq ft of new office space, it was unclear whether any firm, residential market is heavily influenced including new US and Dutch anywhere in the globe, would be able by sentiment, it has the potential to embassies to take on the enormous cost and risk become a self-fulfilling prophesy. • 2.3 M sq ft of new retail space of this multi-billion pound restoration and redevelopment. In real estate terms • 1,600 new hotel rooms This short note is intended to address the site had a negative land value; in • 30 acre linear park many of these issues head on, essence, it was worth less than zero in recognising that much of the press • Over 3 kms of riverside returned to its current condition due to the high commentary to date is not entirely public access and use decontamination and restoration costs. based on hard facts. In fairness, a • Schools, nurseries & community reticence from some developers to spaces In order to create a viable scheme, it was crucial to improve accessibility to the provide a more transparent flow of • 2 new underground stations information to journalists has not location and to propose a high density helped. As advisor and agent to many • Foot bridge scheme that could generate enough of the new residential schemes in the revenue to offset the associated costs area, JLL clearly has its own interests, The last and greatest single and risks. Detailed inspections made clear that the four stacks, and possibly which we acknowledge up front. prospect for regeneration in However, this privileged position also the whole building, would soon become means we are among the best placed central London unstable and need to be pulled down. to provide vital facts behind the real The subsequent confirmation of story unfolding across the mixed use a plan to extend the Northern FORMER MAYOR OF LONDON development at Nine Elms. Line, underpinned by a £1 billion BORIS JOHNSON Government loan and over £250 million from local developers was agreed by planners and Transport for London, alongside a wide UNITS SOLD AND AVAILABLE SCHEMES range of local stakeholders. Direct Based on sales data in the Vauxhall Nine Elms Battersea opportunity area Underground connections will provide a boost to accessibility across Nine Elms, improving the placemaking opportunity for the benefit of all 1000 10 future residents, workers and visitors. Construction on the extension has 800 8 now started, ensuring that the last regeneration area in Zone 1 will be well-connected to the rest of London. 600 6

Residential Market Performance 400 4 Nine Elms is directly across the river from some of the world’s most No. of schemes per half year No.

expensive real estate in Prime Central of units sold per half year No. 200 2 London. However, at the time of masterplanning Nine Elms, south side 0 0 residential values were only one-third H1 2011 H2 2011 H1 2012 H2 2012 H1 2013 H2 2013 H1 2014 H2 2014 H1 2015 H2 2015 of those on the north side of the river. Source: JLL In market terms, regeneration sites can represent very strong opportunities for developers to drive value outperformance against the wider market. However, due to the nature of these sites, often As construction in Nine Sales volumes across the area have with complex land assembly and Elms progresses the area is broadly doubled year on year, with a contamination issues, they are also modest tapering in 2015 in line with associated with much higher risk transitioning from a building slower market activity for all Prime of failure. Indeed, the number of site to a high quality mixed markets. Setting aside the particularly unsuccessful scheme proposals at use neighbourhood strong rate of sales in Q1 2013, Battersea Power Station over the including the record-breaking sales past three decades is a testament to volumes of Battersea Power Station this challenge. As a collective, the JLL NINE ELMS SALES Phase 1 (Circus West), this rate of developments across Nine Elms also HELEN PENFOLD growth is correlated with the growing have the burden of a highly complex number of residential schemes now and competitive market place in which progressing into sales and marketing to bring forward individual sites. It is typical for price growth to occur in phases across Nine Elms. stages on large regeneration sites. Step Regeneration across Nine Elms is also changes are often evident when major From the launch of St James’ a very long-term commitment. From planning permissions are announced, Riverlight scheme in early 2011, the start to finish, construction will take when construction work begins, at number of residential developments place over at least two decades. Any the point when new infrastructure that are actively being promoted has development of that duration must also commitments have been made, or continue to climb; residential units run the risk of changing market cycles; towards the end of the scheme as the in 10 different schemes were for the residential market in London rarely placemaking promises are in evidence. sale as of end H2 2015. Across Nine runs smooth for long, with current softer Due to the long duration of construction Elms, only the Riverlight scheme and conditions a testament to that point. across Nine Elms, it is to be expected Embassy Gardens Phase 1 have been that the area will endure periods of completed, although Circus West at The strong post-downturn recovery of relatively stronger and weaker price Battersea Power Station may complete the Central London residential market growth, occasionally diverging from in late 2016. This also means the has ensured that average values in trend with the wider residential area is beginning to welcome its first Nine Elms, coming from the lowest markets across Central London. new residents; for example, Embassy base of any sub-market in Central However, we would also expect it to Gardens Phase 1 is now over 90% London, have nearly doubled since outperform in value growth terms from occupied. Riverlight - the first residential scheme inception to project completion. - launched in 2011. Across Nine Elms, average value growth for residential has been nearly 35% between 2011 and the end of 2015. In this context, it is worth noting press comment, values showed strong Reassignments, or 'Flipping' the delivery schedule across the improvement during this time. While regeneration area is expected to take the lower-end of average values by Reported discounts of up to up to two decades, which implies a scheme remains remarkably steady, sales rate of roughly 1,000 homes per there has been strong growth in the 10% or 12% in the reassignment annum. With current rates already average and upper-end values at end H2 market are simply not reflective ahead of this level, the risks of 2015. This is indicative of a broadening of conditions in the primary oversupply appear to be well-managed of choices for purchasers and a general sales market, as has been over the course of delivery in the area. upward trajectory in averages values occasionally portrayed in the over the two year period. popular press. The reassignment The relationship between sales rates and scheme availability is important This graphic is important to highlight market, colloquially known as in order to understand current market the influence that individual schemes ‘flipping’, is when the original performance. Some commentators have can have on overall averages. While purchaser of an off-plan rightly noted slowing sales rates, but there is no question that more recent property agrees to sell the this is generally in reference to specific sales rates have slowed for higher future rights to that property to schemes. However, as the graph makes value properties, there remains a solid a third-party. Where this occurs clear, aggregate sales rates for Nine level of confidence in the market for Elms continued to grow up to the end residential properties that represent greater than six months prior to of 2015. This is important, as while good value. The £1,500 psf threshold completion of the property, it is sales rates improved they are being is currently cited as the point where generally challenging to secure spread over a larger number of schemes, buyers become more concerned about a mortgage. As a result, this which has depressed the per scheme supply and are subsequently becoming purchaser is very likely to be an sales rate. It is also the case that, in more sensitive to price. In contrast, all-cash purchaser. line with wider Central London market recent transactions in the £950 psf conditions, a weaker demand profile has to £1,200 psf range show continued emerged, which is also impacting sales strong demand and only modest Many of the original off-plan activity for high value properties. discounting. purchasers will be progressing through three or possibly four Ironically, some of this supply concern The graphic below shows the minimum, deposit stage payments. At average and maximum £psf values will dissipate across Central London the same time, they will have achieved in Nine Elms in both the first as some scheme launches will be half of 2013 and during 2015. As can delayed. Developers can be very adept seen their forward purchase be seen, in contrast to much negative at adjusting to market conditions. commitment increase in value over the past few years (upwards of 25%-30% for many early purchasers). As a result, in order £PSF PER UNIT to crystallise these significant Based on sales data in the Vauxhall Nine Elms Battersea opportunity area gains and to successfully transact with an all-cash purchaser under current, softer market conditions, H1 2013 2015 it is often necessary to accept discounts in order to incentivise MINIMUM £725 £825 the purchaser.

What is often overlooked in reporting on these transactions is AVERAGE £1,035 £1,423 the significant gains that original purchasers will have made.

The reassignment market is MAXIMUM £2,020 £2,950 a very important sub-market that enables development finance and liquidity for off-plan purchasers. However, it bears Source: JLL little resemblance to the primary new build sales market. CENTRAL LONDON NEW BUILD FORECASTS

-3% 0% 4% 5% 3% 2016 2017 2018 2019 2020

Future Prospects of uses. It is expected that price build values and sales rates Weaker market conditions through increases will occur as step changes have remained robust. There is the end of 2015 and into 2016 forced in line with completion of larger widespread confusion regarding the JLL to restate price forecasts for sections of the masterplan, notably release of newly completed stock Central London new build. Notably, the US Embassy, Battersea Power or the sale of nomination rights changes to Stamp Duty alongside more Station main building and the Tube (known as ‘flipping’) to the market recent changes to the global economic line extension. as early investors look to crystallise backdrop have slowed demand. the significant gains noted above, Concerns over the impact of Brexit 2. This tract of Central London which is not reflective of activity in have also contributed to temporary Thames riverside property is the broader new build market. downward price pressure, notably for the last area to hold a wide price Prime markets. discount compared with adjacent 4. In line with current softer market markets on the north side. In conditions, value growth and sales Against this backdrop, there a number comparison with the relative momentum in Central London of factors worth considering in the value parity at Southbank and the will remain below the long-term context of Nine Elms itself. Strand, or Putney and Fulham, trajectory during 2016, with the average house prices in Nine Elms Referendum result increasing 1. As the last regeneration area in are as much as 40% below current uncertainty for Prime markets for a Zone 1 location, there is likely levels for Chelsea on the north a period. However, in Nine Elms to be an accelerated capital side. This suggests a longer-term the medium-term opportunity growth trajectory in line with the arbitrage potential for Nine Elms. for residential outperformance in realisation of the buildings and the last Zone 1 regeneration area spaces that will make up this 3. Despite persistent press headlines remains very strong. emerging area with its wide mix to the contrary, average new

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