Slump forces City Island to rent out rather than sell

02.05.08, http://www.propertyweek.com/story.asp?sectioncode=530&storycode=3112434&c=3

Middle Eastern backers of scheme turn down ‘bulk’ sales of second phase. Doug Morrison reports

By Doug Morrison

the Middle Eastern investors behind a high-profile residential development in Leeds City Island are considering renting out the entire second phase of the complex after failing to sell any of the 185 flats.

Mayfair Developments, the project management company overseeing investors, confirmed the switch in strategy after it emerged that Savills had walked away as the sole agent for the flats.

Property Week has learnt that, over the last six months, Savills has negotiated three separate ‘bulk’ deals involving investors willing to buy all 185 flats.

But Mayfair and its Middle Eastern backers turned down each offer, despite the continuing downturn in demand for flats in Leeds.

Completion due

The uncertainty surrounding City Island, which was designed by local architect Brewster Bye, comes as construction of the second phase, on Gots Road, is weeks from completion and at a time when Leeds has become known in property circles as ‘the empty flats capital of the UK’ as a result of the credit crunch and the collapse of the buy-to-let market.

A spokeswoman for Manchester-based Mayfair told Property Week that the group and its investors were considering changing tack and renting rather than selling the flats in the 20-storey scheme.

‘Because of the change in the market we have to consider it,’ she said. ‘But nothing has been decided. They would still ideally like to sell it.’

She said Savills’ ‘exclusivity’ on City Island was under review and that other agents might be brought in: ‘Savills are still our agent at the moment and they’ve had a few offers from various investors but they’ve just been too low to accept.’

However, a spokesperson for the agent said: ‘Savills is no longer marketing this development.’

The turn of events at City Island reflects the changing fortunes of residential developers in Leeds. Mayfair used local agent Morgans for the first phase of development and, as was common in most schemes until last year, all but a handful of flats in that 404-unit phase were sold off plan.

The scheme has been mired in controversy, however, after it emerged last year that flats had sold for up to £50,000 less than they were bought for through Inside Track, the investment club group, which this week went into administration.

Savills replaced Morgans as agent for phase two of City Island.

Although discounted bulk acquisitions by groups such as Inside Track have declined during the housing slowdown, Savills is understood to have negotiated three sales for all 185 flats over six months, albeit at progressively lower prices.

The agent declined to reveal the identity of the prospective purchaser or comment further on its position at City Island. However, one agent familiar with the scheme suggested that Mayfair had ‘unrealistic expectations’ of values for the second phase.

The downturn in house prices and the fragility of the ‘city living’ market for flats in Leeds have already resulted in one high-profile casualty.

Late last year, market conditions forced Taylor Wimpey to mothball Greenbank, its £100m scheme for 800 flats in the city.

Stark changes to supply and demand are evident from Savills’ latest report on Yorkshire and the Humber, revealed exclusively to Property Week.

The report shows that in 2001 as much as 91% of new residential supply across the region was in the form of new homes on greenfield land.

By 2007 the level of new flat development had increased from 9% to 50%. Savills estimates that greenfield land values fell 14% in the first quarter of 2008. Urban and brownfield values have fallen 10%.

Development viability has been further eroded by rising construction costs and section 106 contributions set against the prospect of lower sales values.

Yet housing delivery needs to increase by 35% from existing levels to meet the latest government targets for the region, the report says. The surplus of flats on the market in Leeds, in particular, is also at odds with local authority housing policy.

Leeds City Council is encouraging the development of family homes but the report suggests there is limited potential to attract families into the large stock of vacant, new-build flats.

‘Without significant amounts of investment in both the immediate and wider city area, families are unlikely to be encouraged to buy on a large scale,’ the report says.

As for buy-to-let investors, the report warns that investors are unlikely to account for such large proportions of new-build flats as they have done in the past.

The report adds: ‘While investor demand is expected to pick up when market sentiment recovers, current conditions are a reminder to developers that they must design units that appeal to owner-occupiers, as well as investors.’

Sheffield steeled

In another report, on property’s ‘most turbulent period for 10 years’, Knight Frank claims that one positive upshot in Sheffield has been rising residential rents.

Unlike Leeds, the strength of its rental market is thanks to the limited number of high-quality schemes, Knight Frank claims.

Tearle Phelan, Knight Frank’s head of residential development in Sheffield, said: ‘The current situation has meant that most residential schemes on the drawing board will remain just that for the time being.

‘High construction costs and the lack of investors because of the mortgage squeeze have seen developers mothballing schemes and not considering new opportunities.’

But Phelan added: ‘City living is here to stay and new schemes will continue to come forward but perhaps not on the large scale witnessed to date. New schemes will be smaller and finished with higher quality and better design with attention to detail.’