London developer halts major project as housing viability hits crisis point

[LONDON] The company behind one of central London’s largest regeneration projects has put the brakes on further work, a warning sign that the viability of residential development in the UK capital has reached crunch point. 

British Land is not pushing ahead with the second phase of its Canada Water development on the south side of the River Thames in the face of soaring costs and lacklustre sales, sources said. 

Work has concluded on the first phase of homes and offices at the project and the real estate investment trust has now decided not to break ground on the next tranche of building until conditions improve, the people added, asking not to be identified. 

At about 21.4 hectares (ha), Canada Water was the largest regeneration project actively building new homes in London’s two central transport districts, outstripping the 17.8 ha Earls Court site that has yet to commence full construction. British Land estimated the gross development value of the project at £5.6 billion (US$7.5 billion) on an analyst tour in 2022. 

Representatives for British Land and AustralianSuper, which is jointly funding the project, declined to comment. 

British Land is the latest in a slew of top-tier developers to highlight the collapse in viability of London projects, with investors caught between stretched buyers struggling with high mortgage rates and rapidly rising costs. The situation has become a major threat to the Labour government’s growth agenda and pledge to boost housing output, with development in London plunging to historic lows. 

Chancellor of the Exchequer John Healey is preparing to deliver his maiden Budget this week in which he is expected to unveil stimulus measures to support first-time home buyers. Landlords including British Land have urged the government to go further with interventions including property sales tax holidays and the removal of other regulatory burdens. 

London’s biggest residential developer Berkeley Group Holdings said earlier this year that it would stop buying new land in the current climate, while national homebuilder Taylor Wimpey has signalled its intent to pull out of the capital entirely.

Longstanding British Land rival Land Securities Group announced last week that it would not pursue the residential led redevelopment of a shopping centre in south-east London after failing to reach agreement with local Green party politicians over the acquisition of part of the site and the amount of affordable housing it would build. 

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Rising costs, falling sales

British Land has so far sold about 30 per cent of the 186 homes in the first phase, the sources said. Faced with sales that are behind target, as well as a growing regulatory burden on residential development and massive construction cost inflation, the company’s executives have opted to focus spending on projects with better return prospects, they revealed. 

The Reit owns a series of office campuses in the UK capital including Broadgate in the City of London, where demand for space and a shortage of supply is rapidly pushing up rents. 

The decision leaves Related Argent’s Brent Cross Town project in north-west London as one of the last remaining major regeneration projects in the UK capital that is actively building. To be sure, such projects can take decades and it is not unusual for the developers behind them to pause or delay phases depending on the market backdrop, only to accelerate when conditions improve. 

British Land has already changed its plans after initially securing outline approval to build more than 4,000 homes at the site. It is now expecting to deliver fewer apartments and instead deliver more alternative uses including offices, though the mix could be subject to further change in future. 

The company has previously said that it would explore the sale of smaller plots on the site to other developers. 

Still, it remains a blow for London which is facing a chronic shortage of new housing. The city is currently building just 37 per cent of the number of apartments required to hit official targets, according to data compiled by residential research company Molior. 

Just 1,440 new apartments were sold in the city in the third quarter, down from a peak of 8,600 in the first three months of 2015, Molior data show. Home sales are a key driver of construction starts, with developers reluctant to break ground on new projects when existing inventory is taking longer to sell. 

In addition to providing affordable housing and contributing to local infrastructure, developers have been hit with a series of additional regulatory changes that have added costs in recent years, including increased fire safety and environmental measures. With house price growth failing to offset the rising costs, profit margins have shrunk or vanished entirely, deterring investors from backing new projects. BLOOMBERG