What is the Future of High-rise Housing?

What is the future of high-rise housing? Examining the long-term social and financial impacts of residential towers.

Market analysis - why towers are a hard sell

It is private renters rather than homeowners who are opting to live in towers. To make them more attractive to homebuyers, developers need to work harder to make service charges more affordable, says David Salvi in his analysis of how the market is performing.

High-rise buildings over 20 storeys make a significant contribution to the delivery of new homes in London with more consents and completions now being delivered in the outer boroughs than the inner ones.

Image of the Barbican Towers.

At the end of 2020, London had around 450 tall buildings of roughly 10 or more storeys, the vast majority of which were built since the 1950s. According to the annual New London Architecture survey of April 20221 there are a further 583 tall buildings of 20 or more storeys in the planning pipeline of which 89% are for resi- dential use. To date, the central and eastern inner London boroughs have the largest number of high-rise buildings. But 22 out of the 33 London boroughs now have high-rise buildings with most being between 20 and 30 storeys. Tower Hamlets, which includes Canary Wharf and the Isle of Dogs, has by far the highest number at 82.

The location of high-rise residential towers has followed the Greater London Authority (GLA) planning frameworks for clustering development opportunities around the capital at Canary Wharf, King’s Cross, Aldgate, Vauxhall/Nine Elms, Stratford, Croydon, Wembley and Old Oak Common.

The Mayor of London’s office emphasises that the potential for increased densities should be explored on large sites and the London Plan recognises the scope for higher-density residential and mixed-use developments in appropriate locations, such as town centres and surplus industrial land. But the GLA also recognises that high-rise buildings can be costly to build, operate and maintain and are not best suited for family housing.

While high-rise buildings make a significant contribution to London’s housing supply, a large percentage of occupiers have been private renters rather than homeowners. And as more high-rise buildings are constructed in outer London many these buildings are earmarked for the Build to Rent sector where demand for homes is high.

The pandemic and lockdowns have highlighted the importance of access to greenspace, private outdoor space and adaptability for working from home. And with on-site facilities being forced to close during lockdowns, it has made traditional houses more popular with occupiers than homes in high-rise buildings.

Market trends in London property

While falls in house prices are being widely predicted following the steep rise in interest rates in the Autumn of 2022, the start of the decade tells an altogether different story. During 2021, over 1.45 million home sales were agreed in the UK, an increase of 13% on 2020 and 25% greater than 2019 according to the data and consumer insights agency, Twentyci. This level of transactions was last seen prior to the 2008 global financial crisis.

Since the housing market reopened following the first lockdown in spring 2020 the UK’s average house price has risen by nearly 16%, reports mortgage provider Nationwide. Larger homes with gardens and spare bedrooms that can double as home offices saw the greatest increase while apartments were the least in demand.

Double-digit price rises have been seen in outer London, but this has not been the case in central London where residential property prices have experienced little if any price movements since Stamp Duty Land Tax (SDLT) rates were increased in December 2014. This is discussed in more detail below.

In 2021, 18,500 new homes were sold in London, of which 69% were in outer London and 31% in inner London, a fall of 7% overall on 2020. However, the 10,500 sales during the second half of 2021 form the highest half-yearly sales in three years. A third of these new home sales were for the Build to Rent sector. Build to Rent now accounts for a significant portion of new homes built in London, including high-rise blocks above 20 storeys.

The Help to Buy scheme, where the government lends homebuyers up to 20% (40% in London) of the cost of a newly built home, plays a major part in new homes sales in outer London but has had little impact on new homes sales in central London, due to a maximum purchase price being restricted to £600,000.

Price premiums for high-rise

Pricing of new homes comes loaded with a ‘new homes premium’. This reflects the high land costs, planning, construction costs and usually high-quality fixtures and finishes.

Quote: The pandemic and lockdowns have highlighted the importance of access to greenspace, private outdoor space and adaptability for working from home.

There is no doubt that the views over London’s historic landmarks afforded by buildings above 20 floors offer occupiers a spectacular skyline of one of the world’s great cities. Accordingly, there is an additional ‘height premium’ that is applied by developers when selling high-rise apartments.

The higher the floor, the better the view and the further away from background street noise. As in any development, the penthouse floor attracts the highest price per square foot. Combined, the new homes and height premiums make high-rise living one of the most expensive options for UK home buyers.

Private balconies and terraces add between 25% and 50% of the internal rate per sq ft to apartment prices. The provision of on-site underground car parking space is typically priced at between £30,000 and £60,000 and is sold as a separate option where available.

Lease lengths in new developments are usually offered at either 250 or 999 years that make homes attractive to buyers and mortgage lenders. In February 2022 the new Leasehold Reform (Ground Rent) Act outlawed escalating ground rents for new leasehold properties. This has removed the opportunity for housebuilders and developers to include aggressive ground rents that escalated every 10 to 20 years and which have increasingly been used as a mechanism to inflate the freehold investment value on completed developments for the developer.

It should be recognised that buyers of high-rise apartments are interested in the same issues as buyers of low-rise apartments and conversions. Lease lengths, annual service charges, ground rent structures, planned maintenance programmes, reserve funds, local amenities, and transport links are all areas of concern to buyers. Today’s buyers have access to readily available data published on the local and national housing markets and are now better informed on the price performance within each individual building.

Where demand for high-rise living is coming from for high-rise living

The external architecture and the design of a residential tower are important considerations for buyers, alongside location. Residential towers are generally accepted as aspirational by occupiers, and buyers appreciate striking high- quality buildings with well- planned public spaces and inviting building entrances. Bringing life to the ground floor of residential buildings with the introduction of retail and leisure uses, including restaurants, would be a welcome addition to the many new towers now planned across London, and can help to enhance the feeling of place and community.

Notwithstanding these amenities, UK purchasers have shown a reluctance to purchase homes at premium prices in high-rise residential buildings. The high level of service charges associated with concierge and leisure facilities within these luxury apartment blocks are often quoted by buyers as a major consideration in the decision-making process. A further concern expressed by buyers is not being able to open windows in some blocks and so having to live with pumped air filtration systems 24/7. Balconies at high levels can be problematic and uncomfortable given wind and heat.

Private apartments in tall buildings mostly attract professional singles and couples who are looking for rental accommodation. This is partly explained by a desire for modern accommodation with the latest design, lifestyle trends and fittings, but also by the fact that tenants are not burdened with the responsibility for paying the annual service charges associated with running high- rise private apartment blocks. In the UK, landlords pay the service charges and tenants pay for cost of utilities.

Overseas buyers have an affinity for luxury high-rise developments and are the main purchasers of new high-rise apartments in central London. Overseas buyers have a range of reasons for investing in London property and are targeted by housebuilders, developers and agents at off plan marketing exhibitions. Overseas buyers are more accepting of higher service charges at high-rise buildings than UK buyers and they value the hotel standard services which are often provided at many of the luxury residential towers. Overseas buyers purchasing for their children who are studying or working in London are also enthusiastic purchasers of high-rise apartments, while overseas investors are also more accepting of lower returns resulting from higher service charges which reduce net returns.

There is little evidence of families living in central London’s high-rise private apartment blocks, even where three or more bedrooms are provided. Occupiers of high-rise apartments in central London are typically professional singles and couples, younger professionals and students, all of whom look to move out when they have families.

One exception where families have bought into high-rise apartment living is at the three 42-storey towers at the Barbican. The 335 high-rise apartments were completed in the late 1960s and form part of a 2,000 unit complex. Parents, many working in architecture and design along with city professionals, have embraced high-rise city living at the Barbican, and their children are growing up sharing on-site communal amenities including play areas, sports, arts, and cultural facilities while making friends and forging community bonds with other families living in the development.

Service charges

There is a significant differential between service charges in smaller blocks without on-site services and in the full range of security and leisure facilities available in many of London’s latest high- rise residential towers. Where buyers can expect to pay an annual service charge of between £3.50 and £4 per sq ft for traditional low rise residential apartments to include building insurance, this annual charge is often between £7.50 and £8 per sq ft for modern high-rise buildings.

Service charges cover the costs of day-to-day management and maintenance and then, longer term, the more major repairs and replacements. Some of these costs are straightforward; for instance, over a five to ten year period the entrances and common areas of all buildings will require redecoration. Residential leases typically prescribe for internal redecoration of the common areas every four years and exterior redecoration every seven years. Less is known, or at least published, on the life of fixture and fittings in high-rise buildings including heating and air conditioning units, lifts and communal amenities including swimming pools. To date, meeting these costs has not been an issue for buyers but it is likely to come to the fore in the next decade.

Managing agents play a crucial role in the maintenance and running of completed apartment blocks. The appointment of a managing agent is initially by the developer, but in many buildings there is a residents’ management company which appoints the managing agent.

There is a general lack of appreciation of the role and functions undertaken by a managing agent, but the role can be made easier and more efficient with on-site staff including a concierge team. The level of service charges including the insurance premiums and sinking fund contributions are often mistaken for the managing agent’s fee. The reality is that the fees paid per annum per flat to the managing agent are often insufficient to provide the level of service that leaseholders expect. Dissatisfaction amongst leaseholders leads to regular changes in the appointment of managing agents as leaseholders look for lower fees rather than providing additional investment in good property and estate management.

The resale market

The price of apartments across central London remains close to their 2014 levels, so there is little incentive for homeowners to sell until they see the potential to profit from a sale. The market has failed to recover from successive rises to Stamp Duty Land Tax targeting purchasers, especially second homeowners, investors and overseas buyers, made by the government in December 2014, April 2016 and April 2021. It is now a distinct possibility that by 2023 residential prices in central London will reach the unprecedented milestone of a decade of no price growth.

The situation is even less favourable for investors and homeowners who purchased in the new towers where a new homes premium and height premiums are part of the original purchase price. Resale prices of private apartments in residential towers that had completed since 2014 were in Q4 2022 still trading at less than the original sales prices.

Buyers are less enthusiastic about buying a high apartment when they have already been lived in, unless prices are discounted from the original sale price. While many apartments are regularly relisted for sale, the evidence is that few attract buyers at above the original sale prices. In a market where there is a shortage of homes for sale it is perhaps telling that there is no shortage of apartments listed for sale in high-rise private blocks.

Changes since Grenfell

The consequences for apartment owners have been dramatic across the whole of the UK since the Grenfell fire in 2017. All buildings above 18 m have had to have intrusive fire safety surveys to establish if they contain flammable cladding and even buildings below 18 m have been affected. The investigations have revealed many problems other than dangerous cladding: combustible insulation that needs to be replaced and missing fire stopping that needs to be inserted.

Additionally timber decking on balconies and even timber handrails are now being condemned, with lenders unwilling to lend on any building which does not have a compliant EWS1 (External Wall Survey) certificate.

While residential buildings of all heights completed since the 1980s have been found to require fire safety remedial works, high- rise buildings completing since 2018/2019 have benefited from additional checks during construction and are sold with compliant EWS1 certificates that enable banks to lend.

Longer-term considerations

We believe that the sales and rental market in high-rise buildings will continue to reflect general housing market conditions with individual buildings experiencing a range of maintenance issues and planned maintenance programmes.

The majority of apartment buildings are managed with a sinking fund that helps mitigate against planned and unplanned maintenance items in buildings. This is clearly beneficial to all parties but does not guarantee that leaseholders will not be expected to fund shortfalls where sinking funds are exhausted or insufficient to cover essential or unexpected works.

The life of the latest intelligent electrical fittings, air conditioning and heating equipment being fitted in to high-rise private apartments and the anticipated costs of replacement is covered elsewhere in this report, but fire safety issues now being identified post-Grenfell illustrate the potential cost implications and practical implications of arranging remedial works on high-rise buildings.

It is surprising that developers in the London boroughs are on course to deliver up to 526 additional high-rise apartment blocks with a range of on-site facilities including, concierge services, gyms, cinema rooms, residents’ lounges, treatment rooms, swimming pools, storage, and parking. The annual cost of providing these facilities is often way beyond most first-time buyers and families.

We see an opportunity for developers of high-rise buildings to attract new domestic purchasers by repackaging what they offer and include additional services such as dental, optician and nursing care specifically focused on older downsizers. These services could be charged separately from the annual service charges but could prove popular with retired homeowners looking to enjoy city centre living. This would free up much needed family housing at the same time as providing new lifestyle choices for older homeowners, who wish to retain independence at a time when they are mortgage free and are able to afford to pay for the convenience of having such services available in the same building they live in.

The expansion of the Build to Rent Sector in the outer London boroughs is increasingly offering a solution to developers including of high-rise towers where private sales have stalled. This growing sector is in many ways better positioned to manage onsite amenities and maintain buildings while being able to offer tenants attractive facilities including security.

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