Residential property in London has echoed some of the national trends over the last few years, following the UK into the second dip in house prices over the second half of 2010.

However, more recently property in London has outperformed the national average, reflecting a wider confidence in the capital’s housing market. As a consequence this has caused housebuilders and developers to refocus activity on London in the expectation that it will lead recovery in the market.

According to HBF, demand in terms of site visitors and net reservations are significantly stronger in London. Homebuilders’ view of sales in the year ahead has been more changeable compared to the South East and Great Britain; however, its current position is more optimistic. The HBF net balance of opinion of London sales shows a positive balance of +63% in June.

Confidence and demand

Demand is underpinned by buyer confidence and also a greater ability of buyers to purchase within a mortgage constrained market. It is also the ability to sell property to overseas buyers in those locations which Asian buyers, in particular, are familiar with. In addition, new supply is constrained, supporting current pricing.

The latest (revised) housebuilding figures for the first half of 2011 show that housing starts are -21% below peak levels (H1 2007) but ahead of England, which is still -45% below peak levels.

While comparatively robust, these figures are still well below the Mayor’s target; London’s annual completions currently stand at 18,070, which is 56% of the target (to deliver 32,250 homes per year till 2021). This demonstrates the shortfall that London is experiencing in terms of new housing provision.

Housing scarcity

Against this context, it is not surprising that national volume housebuilders are showing confidence in the London market and have focused their development strategies towards London, where the market has proved more resilient over recent years.

In particular, affordable housing has been strong (accounting for almost half of all starts in H1 2010); but is now diminishing (accounting for just over a third of all starts in the first half of 2011). It is likely that we will see this downward trend continue as public funding, and some affordable housing providers' ambition, is scaled back.

Some of the recovery in housebuilding starts can be accounted for by public investment in both the public and private sector. London’s new build housing market has benefited from a significant amount of government funding through initiatives such as Kickstart, HomeBuy Direct and the National Affordable Housing Programme (NAHP). Kickstart and HomeBuy Direct have now finished and the NAHP has significantly less investment available.

Risks to the London market

Despite homebuilders’ positivity about sales in the year ahead, we must not get complacent about the strength of the London market as it is also heavily susceptible to changes in the economic and political climate.

Currently, London is seen as a safe haven for international wealth. Coupled with the advantage of a weak sterling dropping the real cost of property in the UK, this makes the capital very attractive to overseas purchasers.

One of the reasons London is leading is because of the impressive strength of recovery in the prime London boroughs.

Prime Central London has shown significant price growth ahead of mainstream markets both in the capital and the rest of the country, leading us to revise our forecasts for Prime Central London up to 8% price growth in 2011. Prime Central London in particular relies heavily on overseas investment, which accounts for almost half of secondhand sales and almost all of new sales.

Previous economic unrest in the eurozone has driven investment to London, but as the effects of the current bailout package are yet to fully manifest in the residential market, it is possible that buyer confidence, one of the main drivers of demand, may be dampened.

Local differences

We also have to acknowledge that there are differences at a local level within London, as well as between the regions. Prime London markets appear stronger, with transaction and price levels approaching or exceeding peak 2007 levels in some cases.

These markets are less affected by lack of mortgage availability and have stronger income and employment prospects.

Against this context, Map 5.1 illustrates the committed pipeline across the London boroughs split by units which are unbuilt and those which are under construction but currently unlaunched.

Committed supply is heavily skewed to the east, in boroughs such as Newham and Barking & Dagenham, where residential values are still only reaching 87% and 81% of peak levels respectively.

In contrast, some local markets (such as Hammersmith & Fulham and Camden), which might be considered stronger and where prices have exceeded peak levels, have very low committed supply.

The current mismatch between demand and the supply pipeline creates gaps in the market which, despite the risks, means there are now real opportunities for developers.

Taken from
Focus: Development, Investment & New Homes, 2011