Our projected sales volume in 2013 is 50% more reliant on larger sites (of more than 500 market units) than the very strong sales year of 2011. This concentration of supply capacity is a limiting factor to rates of market absorption into the owner occupied markets, particularly in the fringe of central London in which many of these sites are located. International investors do buy in these locations but there are limits to the volumes of such demand.
Our view of future rates of completions are based on a view of when construction is likely to start on site and the rate at which new homes will be brought forward into each market. Aggregating all projected sales rates and completions; we expect delivery of market homes to settle at 13,300 per annum over the next fiveyears, 35% below the Mayor’s minimum target.
Institutional investment in build to let would unlock extra market capacity from the rental markets. Demand from frustrated first time buyers is pushing up rent levels which have shown double-digit annual growth during the last two years. Short-term rental market indicators remain positive in the upper mainstream markets, albeit that lower value markets exposed to cuts in Housing Benefit are showing some signs of weakness.
Lower mainstream
(up to £450 per sq ft)
Around one quarter of sales are expected in the lower mainstream market, at less than £450 per square foot, in locations that are mostly further out from central London. This is the market segment in which the mortgage constraint is most pressing, such that schemes like NewBuy (offering a mortgage indemnity guarantee to any buyer of a new home up to £500,000 value) and FirstBuy (offering an equity loan to a first time buyer of a new home) have most impact in boosting market capacity.
This is also the market segment in which there should be the greatest volume of demand from London’s workforce, subject to the availability of mortgages. More than 60% of London’s 3.4 million households have an income of less than £70,000 and are not housed in the social rented sector. Although these households may be eligible for shared ownership, they may prefer to buy outright in a cheaper area.
Mid mainstream
(£450-£700 per sq ft)
We expect almost half of sales and market completions to be in the mid mainstream market, selling at between £450 and £700 per square foot. The greatest scarcity of supply (relative to past sales volumes, inflation adjusted) is in this market segment. Development schemes selling into this market tend to be within or on the edge of Zone 2 of London’s public transport system.
Upper mainstream
(£700-£1,000 per sq ft)
The market segment that ranks second in terms of scarcity is the upper mainstream, between £700 and £1,000 per square foot. We expect one in six sales to be in this segment, on sites that are generally in the higher value parts of Zone 2.
Prime
(£1,000-£2,000 per sq ft)
The prime and super prime markets account for some 10% of London’s new residential development sales by the number of homes delivered but more than 30% by value, on sites in the highest value markets of central London, centred on Westminster and Kensington & Chelsea.
These are expanding markets, shaped by London’s creation of individual wealth within the London economy and more widely in the global economy. Around 90,000 people in London pay higher rate income tax (on annual earnings in excess of £150,000), according to HMRC, equivalent to less than 3% of households.
We expect wealth in London and the global economy to continue to increase, albeit that employment in London’s finance and business services sector has contracted during the last year.
Political decisions such as the recent increases in stamp duty and proposed annual charges on houses in the £2 million+ market are a threat, but the market appears to have absorbed the changes so far.
Many of the new properties in this market are differentiated from second hand stock by the provision of services, design and views, so there is potential to increase the new build share of an expanding market.
Many of the sites that will be delivered into the prime markets during the next five years are in riverside locations, so developers will be able to capitalise on this product differentiation.
Super prime
(£5m+)
At the very top end of the market, the annual supply of new residential properties selling at prices of £5 million or greater is set to more than double to over 100 sales in 2014. However, in 2011 there were twice as many transactions in this market, including second hand sales, compared with 2006, as a result of strong demand from a growing 10 number of global billionaires and house price inflation in this segment.
At 2011 sales volumes, absorption of these properties would equate to a new build market share of around 30% of the whole super prime market, which could be in the same order of magnitude as the 20% share in 2006 and 2007 if the market continues to expand at its current rate.
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