They know that if they blow their bubble too big, it will implode. Smaller bubbles will float gently into the sky. Deal risk and product risk are generally definable, particularly in the short term. Market risk, however, is different because development can be protracted.
So how is it looking out there? Are there big bubbles ready to burst all over the residential market or in the gravity-defying shopping centre investment market or the regions – even before the bubble is inflated?
‘Pretty bubbles in the air’
There is none prettier than the London residential market right now. It is firing on all cylinders and is as close as you can get to a no-brainer for those fortunate enough to be holding sites with planning permission for the right product. No wonder it is mesmerising international buyers with its bubble show. London’s residential market is a sophisticated and multi-layered one, though. The same issues will not affect every buyer.
‘They fly so high, nearly reach the sky’
Yet each time we say “it must be over”, a new wave of bubbles soars even higher – and herein lies the crux of the issue. These are multiple bubbles, in the residential market, or any other market for that matter.
Politicians are constantly flying the flag for greater momentum in family housebuilding across the UK and bemoaning that demand massively outstrips supply — remembering, of course, that these buyers generally need finance. But in London, the dynamics are different.
‘Then like my dreams, they fade and die’
So, just as small, perfectly formed bubbles seem to have a longer life and climb highest, the larger bubbles don’t travel as far, their shape is often distorted and they are prone to bursting messily and quickly. These bubbles can maintain their shape as long as they are not exposed to dangerous external forces or blown up too quickly.
A slowly inflated “bubble” in Nine Elms Lane may provide the homes and communities so desperately sought after by local authorities. But a hard push by an over-eager player could burst that bubble, causing long-term value destruction and collateral damage. Other areas of the capital, typically in central London, are so tight on supply that they can find only enough washing-up liquid to blow a small bubble. In return, however, they can achieve stratospheric pricing.
‘Fortune’s always hiding, I’ve looked everywhere’
During my 25 years in this market, I have looked everywhere for the answer. It is a practical, experience driven and obvious, but important, series of inputs that is required to generate the desired returns. Supply and demand, with a reasonable understanding of the external influences on that equation, such as timing, competition and planning environment, will dictate how large we try to blow our bubble.
Therefore, we blow the mixed-use bubbles, in a market we understand, with clear guidelines and sensible expectations on a near-term view. We spend time nurturing their existence and guiding them to the levels we need.
Supply and demand are clearly not being analysed systematically. Nor are the key influences on the impact of third-party/political or fiscal decisions being appropriately considered. Relying on first-past-the-post tactics is naive and bordering on the reckless. Trying to protect an extra-big bubble will get messy.
Shopping centre valuations, anyone?