The capital’s need for residential property

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There is significant excess demand for residential property in London, specifically in the affordable sector. Despite weak and falling house price growth in the capital, developers are turning from the underperforming retail sector to residential and mixed-use property, where buoyant demand is observed.

The Mayor of London, Sadiq Khan, is significantly underachieving his housing targets, particularly in the affordable property segment. Over 66,000 new homes are needed in London each year, yet only 41,371 were delivered in 2016-17 according to a report published by the London Assembly Housing Committee. Turning towards this year’s performance, we observe that whilst the target range for new residential construction stood at 14,500 to 19,000 starts, there were only 2,400 starts recorded in the first six months of the year. This is especially problematic for the affordable sector, which represents almost half of London’s current demand, yet only 14% of all home starts in this Mayoral term were social rented homes.

The shortage in supply is clearly putting pressure on prices, with a 0.3% increase observed across the UK in November, to a new average of £214,044, which is 1.9% above the same month a year ago. Despite the current economic conditions pointing to low borrowing costs and the unemployment rate nearing 40-year lows, there is still a significant squeeze on household budgets and a high degree of uncertainty in the markets. However, market leaders suggest that if the level of uncertainty is somewhat reduced, we may see a pick-up in house prices through the next year, given the broader favourable environment and that only modest increases in interest rates are expected in the years ahead.

Whilst London experienced slowing net additions to supply this year, with a drop of around 20%, performance among other regions suggests that supply is generally responding to price signals. Over the last decade, the housing supply in England has grown by 1.9 million, which represents a rise of 8.5%, according to the November index.

From retail to residential

With the retail sector underperforming in both the occupier and investment markets, investors and developers in the capital are currently facing some difficult decisions. British land, the owner of Meadowhall shopping centre, has recorded a £42m loss in the first half of the year, despite earning a £238m profit a year ago. In order to adjust to the current conditions, the company is turning to a new area of focus – 5,000 build-to-rent (BTR) housing units across its sites. Like Landsec, a commercial developer who has revealed plans for more than 4,000 homes across its suburban London retail sites, British Land believes that the residential and mixed-use markets are underpinned by sound fundamentals.

In conclusion, the excess demand for residential property in the capital is likely to give rise to an increase in ‘change of use’ additions, whereby property developers and investors shift their focus from underperforming sectors such as retail, to residential or mixed-use property. Such moves are likely to be supported by the boroughs, given that the Mayor has received £4.82 billion to deliver 116,000 affordable homes starts by March 2022 and is also falling behind on his overall housing targets.