Prime London Residential Markets

Prime London Residential Markets
 
On the supply side

21 September 2016, by Edward Green

Supply numbers in the prime new build market, specifically in the £1,000psf+ range, are high

 

Given the scale of the prime development pipeline in London and the extent of the new build premium that has developed over the past five years, there has been fervent speculation as to what the future holds for this sector of the prime London market.

There is little doubt that the headline numbers on new build supply, though often prone to overstatement, are big.

THE PIPELINE

Before the referendum, we expected 39,000 £1,000psf+ completions to be delivered in total over the five years to the end of 2020. This would represent an 110% increase on the previous five years. Much of that supply is concentrated in areas of major regeneration at price points between £1,000psf and £1,500psf.

By contrast at the very top end of the market, above £3,000psf, the supply of new homes is much more limited. Super prime supply, that is typically located in the established parts of central London, only accounts for 3% of the expected five year pipeline.

There is little doubt that, for all of the reasons detailed earlier in this publication, developers active in the £1,000psf+ new build market should remain realistic on pricing and be prepared to be flexible in negotiations if they wish to sustain sales rates that are crucial to their financial model.

FIGURE 7

Prime London new build delivery (over £1,000psf)

 
Figure 7

Source: Molior

FORWARD SALES

However, it is critical to understand the historical relationship between the delivery of high value new homes and their rates of sale in the prime new build markets to identify the risks to the market.

Though the gap has now closed as more completions have come on stream, sales outpaced construction completions by an average of more than 2 to 1 between 2011 and 2015, reflecting strong demand.

As a consequence, up to 60% of schemes currently under construction are already sold which will serve to mitigate future delivery volumes. Furthermore, purchases in the early phases of marketing will often have been at discounts to current values.

In the early part of this period, overseas investment activity was dominant. However, over the last three years domestic UK buyers have grown significantly in both proportion of sales and absolute numbers.

Our records indicate that in 2013, 17% of prime new build buyers were from the UK compared with 43% in 2015. This trend has continued into the first half of 2016, with UK buyers accounting for over 45% of the prime new build market.

This level of domestic demand will be of some comfort to the development industry, while a cheaper sterling should support continued overseas investment activity.

Despite the vote to leave the EU, London remains a key centre due to its global standing, amenities, quality of life and facilities. It continues to be the preferred global destination in which wealthy people invest and live. In 2015 alone, the prime London new build market saw overseas investment from over 50 different countries.

PUSHING OUT

We expect the market to be more discerning in terms of location and product offering and how pricing stands up to these fundamentals. Specifically the volume of prime completions will test rental demand and yield expectations and, if sales rates are to slow, lead to higher volumes of standing stock.

This is likely to mean developments will be pushed out and delivered over a longer period. Importantly, only 23% of the 39,000 unit five-year pipeline is currently under construction, while 58% of the total pipeline is yet to start construction, despite having full planning permission. Although there is cost involved in putting construction on hold, this substantially lessens the risk of oversupply.

FIGURE 8

Challenges and opportunities in the prime development market

 
Figure 8

Source: Savills Research


COST OF BUYING AND OWNING

London remains competitive on the world stage

Ultra high net worths from around the globe have over the past few decades selected prime London in which to store their wealth for many reasons, not least because in the past this has been a favourable tax environment. The latest in the series of tax changes is the additional 3% stamp duty costs for additional homes introduced in April 2016.

Despite the currency advantage that some overseas investors currently benefit from, they may now start to feel the compounded effects of recent tax changes. However, our analysis shows that a $2m property in London remains very competitive on the global stage when the costs of purchasing, holding and selling property are considered. The tax costs in London remain less expensive than New York (arguably London’s main competitor when it comes to international property investment), as well as Hong Kong, Paris, Tokyo and Singapore. Vancouver, a popular investment hotspot for Asian buyers, now tops the table in terms of tax costs as a percentage of property price (at 27.8%, compared to 12.6% for London property), as it recently introduced an additional charge for overseas buyers.

 

 
London remains competitive on the global stage

▲ London remains competitive on the global stage

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