Credit crunch claims popular construction model

Off-plan developments, where sales come before construction, have all but ended in the current economic climate.

LONDON: A glaring example of a real estate market gone bad can be seen at Wichelstowe, a planned development of 4,500 new homes near Swindon, about an hour's train ride south of London.

Work began about three years ago at the site, which covers 756 acres, or 306 hectares, and, in a hot market, building would have been in full swing by now. But so far, only around 100 homes have gone up, and a large number of those are publicly subsidized  housing.

The economic crisis has claimed many heads around the globe; but one of the biggest is off-plan developments, the projects, like Wichelstowe, that start selling long before the first bulldozer arrives — and that have driven much of the real estate boom in Europe, the Middle East and Asia in recent years.

In the greater London area, "house builders were selling a minimum of 50 percent of their properties off plan," said Rob Soning, founder of Londonewcastle, a niche property developer in central London. And though there are no readily available statistics, Soning said he believed that the proportion was similar across most of Europe in recent years.

Now, Soning said, "the off-plan property market is potentially going to be dead for a long time."

Industry experts say it is the credit crunch that did the killing.

"Mortgage lenders won't lend on off-plan property in the current tight credit market, viewing off plan as an increasingly risky property type in case the development never gets finished and the developer goes under," said Camilla Dell, a buying agent at Black Price Property Solutions, who works in the central London market.

Ray Boulger, the senior technical manager in London at the independent mortgage broker John Charcol, agreed that it was nearly impossible to obtain such a mortgage today.

"Two or three years ago someone would have bought an off-plan property with the feeling that they'd be able to obtain a mortgage on the basis of a rising property value," he said. "That's no longer the case."

And few builders are willing, or able, to construct "spec" properties these days, Boulger said.

In Britain, for example, he said there would probably be no more than 75,000 housing starts this year, half of the total two years ago.

Real estate prices in Britain dropped about 16 percent last year, and experts warn they could fall 25 percent in 2009 unless lenders start pumping money into off-plan projects and the rest of the real estate system. But they acknowledge that such support may be a long time coming.

Ed Mead, a director at Douglas & Gordon, a real estate agency in London, said off-plan developments were popular with two types of buyers in particular — those who hope to "flip" a property for a tidy profit and those accustomed to earning hefty bonuses, like investment bankers, that paid for their lavish lifestyles.

Like in Britain, real estate in Spain has been suffering through the market downturn. In addition to the lack of credit in Spain, a glut of finished properties has halted the sale of off-plan developments.

"Who needs the headaches?" said Mark Stucklin, a consultant in Barcelona who runs www.spanishpropertyinsight.com. "Over all, the residential market is very quiet here."

He said sales in Spain were down 29 percent in 2008. "With rising unemployment, properties sales are falling fast," he said, noting that an additional 200,000 people in the country lost their jobs in January. "And certainly, no one is selling off-plan projects."

Other countries, too, are littered with half-finished construction projects.

In Iceland, where interest rates have risen to record levels of around 18 percent, construction cranes stand idle among half-finished homes in commuter suburbs near Reykjavik, many of them off-plan developments.

"There are a lot of projects all over the place that are just sitting there and not getting finished," said Frosti Olafsson, deputy director of the Iceland Chamber of Commerce in Reykjavik. "The building of many luxury condos has suddenly stopped."

"There is a lot of uncertainty in the market and that will continue throughout the year," he added.

Like in Europe, the credit crunch also has taken a bite out of the previously booming real estate sectors in Asia and the Middle East. For years, demand in these regions has been most vigorous among speculative investors who wanted quick profits. But such investors have pulled back as credit has become increasingly scarce.

In Hong Kong, for example, large numbers of real estate agents are out of work and some experts are predicting a fall in prices of as much as 30 percent by summer from a year earlier. As a result, many developments have been scaled back or suspended.

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