Page last updated at 23:01 GMT, Thursday, 8 October 2009 00:01 UK

Financial shadow cast by city apartments

By Kevin Peachey
Personal finance reporter, BBC News, Leicester

Thames Tower
Sales have been completed at only 14 of the apartments in Thames Tower

Grey, concrete, 16-storey Thames Tower is typical of the newly-built or renovated apartment blocks thrown up across cities in the UK in recent years.

It dominates the skyline on the northern tip of Leicester city centre, overlooking the inner ring road and the edge of the shopping district.

But it has cast a much darker shadow over its developers and the investors who chose to sign up for one of its 112 apartments which were being revamped during the property boom.

Contracts were signed for all but one of the apartments, but today only 14 have been bought and are occupied. The withdrawals caused the collapse of the developer, Brampton Asset Management (Leicester) Ltd.

Now the administrator could pursue these buyers through the courts for broken contracts - and the law says that they could be forced into completing the sale.

City living

The fashion for "city living" accommodation paints a picture of the UK housing market in recent years.

Flats prices graph

During the housing boom, developers were scrambling to build city-centre apartments and the new breed of buy-to-let investors were falling over themselves to buy them.

Prices of flats shot up, peaking at an average of £175,776 in January 2008 in England and Wales, according to the Land Registry.

But then prices plunged. By May 2009, the average flat was worth £141,565, when values were falling faster than any other type of property. From peak to trough, the price of a typical flat had fallen by £34,211, or 19.5%.

It was a nightmare for buy-to-let investors who saw they would lose in the short term, rather than gain, from their investments. The banks were also rationing mortgages, leaving some without the funds to buy even if they wanted to.

It proved to be bad timing for Thames Tower.

"Some people can't get a mortgage now whereas 18 months ago they were offered a mortgage left, right and centre," says administrator Chris Stirland, of Vantis Business Recovery Services.

Order of Specific Performance: An injunction to make a buyer perform his or her part of the contract and complete on the purchase agreement
Rescind the contract: The seller cancels the contract, keeps the deposit and retains the property in an attempt to resell it
Rescind the contract and sue: The seller goes to court to claim any unpaid deposit and then tries to resell
Damages: If successful, the buyer who pulls out pays the seller the difference between the contract price and the value at the date when completion should have taken place

One-by-one, some of the would-be buyers missed their completion date on the restored apartments with laminate floors and fitted kitchens. As a result, the bills built up for the developer which was expected to repay bank loans and pay contractors.

"It is unfortunate that the recession hit when these flats' contracts were due to be completed. If all the contracts had have gone through the indebtedness to the banks would have been paid off in full," says Mr Stirland.

"If the completion dates were six months earlier, all those people would have paid. Mortgage products were still in hand then. The bank and creditors would have been paid and it would have been a completely different story."

The developer collapsed and the administrator came in to restore as much money as possible for creditors. The apartment block, Mr Stirland says, remains a good prospect.

Some of this comes from ground rent and service charges from the existing residents, and new laws mean that no business rates on the empty offices at the base of the property, or council tax for the empty apartments, is being levied by the local authority.

But a key reason why the administrator does not have to accept a quick sale - despite interest from at least 30 different parties - is the £100,000 income coming in from renting out the roof of the 190ft tower for telecommunication masts, such as mobile phone masts. The leases expire in 2019 and 2020.

Masts on Thames Tower
Income is generated from space given to telecommunications masts

But the administrator has also written to all those who have signed contracts and are yet to complete.

Mr Stirland says he wants to come to an amicable arrangement with them all, which could include completing or rescinding the contract and losing their deposit of about 10%.

However, while the financial benefits are obvious for the creditors, the would-be buyers could face legal action.

"You have a developer who has potentially lost out, and you have some contractors who were dependant on the developer getting paid," says Mr Stirland.

"You are affecting the lives of quite a few people, so you have to marry that with one or two individuals who wanted to make a profit and have been unlucky in the timing of their investment."

More and more of these cases are being heard in the courts, where profit-chasing buy-to-let investors are getting stricter treatment than homeowners during the recession of the early-90s, according to Jeremy Raj, head of residential property at City law firm Wedlake Bell.

Unlike most house buyers, buy-to-let investors have tended to exchange contracts and pay their deposit off-plan when apartments were being built.

That meant there was an unusually long wait before completion and payment in full - a period in which the downturn hit mortgage availability and house prices.

Some of the decisions might be regarded in decades to come in the same way as we look at some of the blocks that blighted city centres in the 60s and 70s
Jules Brown, North of England Civic Trust

But instead of just taking the deposit and selling the apartment to somebody else, some developers are seeking orders requiring "hundreds" of customers to keep to the contract and buy the apartments.

"There is a worryingly widespread and entrenched belief among buy-to-let investors that if they decide to withdraw from a purchase for which they have exchanged contracts, that only their deposit is at risk," says Mr Raj.

"The legal position is quite clear. They are legally obliged to complete on the transaction.

"Damages are not even restricted to the difference between today's market price for that property and the price they contracted to purchase at."

The legal term of this process of forced purchase is an order for "specific performance" - an injunction granted by a court which has fairly broad discretion.

Boom and bust

The buy-to-let boom and bust epitomises the rise and fall of the housing market in the last decade.

There is a chance that empty city-centre apartment blocks will be the legacy, not just economically but socially and architecturally too.

Jules Brown, planning co-ordinator for the North of England Civic Trust, says developments in cities such as Leeds and Newcastle might show that we have failed to learn from previous mistakes.

"They went up very quickly, and some of the decisions might be regarded in decades to come in the same way as we look at some of the blocks that blighted city centres in the 60s and 70s," he says.

"In a generation, we might ask what an earth were we doing."

Mr Brown says that the market will decide whether it will also be considered as a financial mistake as well. He says that prices will show if the "pile them high and sell them cheap" approach has led to an oversupply.

Jeremy Leaf, housing spokesman for the Royal Institution for Chartered Surveyors, says that - similar to the rest of the housing market - a shortage of the right flats in the right areas had meant prices had started to rise again since May.

Yet alternative uses were trying to be found for those flats - often on cheaper land - that nobody wanted to move into.

Back in Leicester, and the recession has not completely stopped the construction of new apartments in the city.

One example is the new Phoenix Square development in the city's cultural quarter, with cinemas in the basement and "individual" eco-friendly apartments upstairs.

Its location makes Peter Connolly, the complex's development director, confident that the apartments - selling at between £71,000 and £210,000 - will all be full in a year.

In his presentation, location is everything - but he must hope that the shadow cast by the economic downturn does not stretch this far.

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