City Residential: Risk has ruined fractional sales
The agent’s summer report details the waning use of fractional sales in Liverpool, while highlighting a build-to-rent development pipeline worth more than £600m.
Developers originally turned to fractional sales in order to help them deliver more units and schemes than typically afforded through a more traditional funding model. According to City Residential, there has been a distinct lack of bank funding for residential developments, which then forced developers to turn to fractional sales.
According to the report, this is down to the negative connotations associated with fractional sales due to a number of stalled schemes, including failed projects by North Point Global and Pinnacle Alliance amongst others, which were initially financed from fractional sales. When these schemes collapsed, the buyers had financed up to 75% of the buildings for no return, rather than the standard 10% deposit.
The agent’s managing director Alan Bevan said that other issues and challenges have arisen from fractional sales, but by no fault of its own: “Fractional sales schemes have been sold with the benefit of a guarantee yield by the developer. Often these guaranteed yields have been offered for a period of three to five years at levels between 7-10%.
“Unfortunately with the vast majority of these sales the quoted yields have been in excess of what is genuinely achievable and have resulted in returns lower than anticipated.”
This risk-averse attitude of investors, Bevan added, along with their eye towards developers which have a great track record of delivery of schemes in good locations, has also led to a rapid decrease in the fractional sales model.
“Although Liverpool has suffered a much higher percentage of stalled/problem sites than other UK cities, the model has started to struggle across the board,” he said.
“There is still a good strong demand for Liverpool property from both overseas and UK investors but the focus of these buyers will be those developers who can afford to fund schemes with more normal deposits and deliver on their promises.”
Overall however, despite Brexit fears which seem to have dissuaded some overseas investments in parts of the UK, Bevan believes Liverpool to have “become rather immune to the macro picture” and sees it “performing in line with expectation”.
“While transaction levels are definitely not booming, there appears to be a decent level of buyers and sellers looking to do deals at prices that genuinely reflect the true worth of the asset in question”, he said.
Liverpool’s build-to-rent pipeline now stands at 3,372 apartments, including the 661 built, with 1,002 under construction and a further 1,219 with planning approval, along with 490 awaiting planning. Combined, these have a gross development vale of £603m.
For City Residential’s full quarter three report, click here.