Can London Residential Construction Keep Pace With Demand?

The London property market is continuing to outperform its European counterparts, with demand showing no signs of abating any time soon...

The London property market is continuing to outperform its European counterparts, with demand showing no signs of abating any time soon. While this is good news for those looking for real estate investment opportunities, there are some that question whether construction in the city can keep pace with demand. Lucian Cook, head of residential research at Savills, claims that existing stock is notoriously limited in London and there is an "acknowledged shortfall" of housing across the city. Combined with a perceived lack of new builds, the market could potentially be in trouble.

"There seems to be this continuing underlying growth in rental demand and it is very difficult for that to be met if you have restrained levels of house building," Mr Cook explained. "There are acute shortages in the private rented sector where you've got very strong demand from what is rapidly being called generation rent, which are those under the age of 35 who are unable to raise a sizeable deposit which they need to access owner-occupation."

To solve the problem, Savills believes it is imperative for investors to encourage house building. "The need for institutional investment in the private rented sector has probably never been greater," Mr Cook stated. Renewed verve among investors will in turn stimulate construction, which is believed to be key to securing choice and affordable property for investors, tenants and homebuyers alike. However, Savills acknowledges that any increase in the wholesale supply of private rented sector stock is dependent on investors being confident that they can get maximum returns from assets.

Increasing the availability of residential property in London is also reliant on the ability of construction companies to secure prime development land, which is increasingly hard to come by. A report by Knight Frank recently revealed that the supply of residential land is currently low in London and projects often face barriers when trying to navigate through the complicated planning regime. The estate agent claims that a more streamlined system is needed in the city to release more land and "breathe life" back into funding. However, such a change is unlikely to occur any time soon, as the National Planning Policy Framework is continuing to bed down at a local level. This means that developers are now locked in somewhat of a stalemate with the planning system.

Nevertheless, there are some that believe making it easier to gain approval for construction projects would be damaging for the London market, which is already oversubscribed with new developments in prime locations. There had been a fear that the city would be inundated with completions in 2013/2014. However, Savills' Prime and Super Prime London New Build Supply Forecasts is adamant that this is not the case. According to the firm, completions will be much lower than predicted, as not all that received planning permission will be built immediately.

What will be witnessed is a modest increase in delivery, which will help supply a market that is low in stock and has faced four years of low completion numbers. The overall volume of completion will be around 15,000 units by 2019, with just under 2,000 units delivered per annum. An overhang of stock will be prevented by the distribution of construction projects across different locations, price points and market segments.

For those considering property investment, construction projects mean that in the coming years there will be a great choice in London, but competition will remain fierce, as the city continues to enjoy high prices. Demand will be sustained through the position of UK capital as a global hub for business and investment. By the year's end, it has been estimated that central London alone will witness a turnover of GBP 16 billion – a 35 per cent increase since 2011, when GBP 11.8 billion was transacted. According to Jones Lang LaSalle, this growth is unlikely to stop anytime soon. Rising demographics and savings rate increases are creating an environment beneficial for both domestic and foreign investors, which will only become more lucrative as new construction projects create more opportunities in the market.

- Monday 17 December 2012

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