But the scale of the funding gap is massive. To build this many extra homes, an annual funding gap of almost £14 billion needs to be plugged. Developers must find £6 billion of development funding a year to build and buyers require a further £7.5 billion to purchase those homes. Given that mortgage lending for house purchase in London is currently running at about £17 billion a year, banks would have to increase lending by 40% to meet that demand, which is not realistic in the short-term.

We expect housing demand in the market rented sector to continue to take up this slack, expanding to more than one third of London’s housing stock by 2017. The international source of much of central London’s expanding workforce only accentuates this trend.

The good news story for London is the substantial investor appetite for London’s residential market, as demonstrated by international investment in development projects, such as Battersea Power Station and Greenwich Peninsula. In addition to this, the institutional residential investment market is currently trading at annual turnover levels in the order of £2 billion, constrained by the availability of stock, particularly in London and the South East. Given the strength of rental demand in London, there is investor appetite for this to multiply in scale.

With both bank lending and government spending constrained, these are the sources of residential investment that can bring forward the scale of supply that is needed. There is also political appetite for this to happen, using schemes such as the government debt guarantee and the Build to Rent fund.

Viability in planning

In addition, financial viability at planning is crucial. This is highlighted by the Mayor’s new planning guidance, which recognises the distinct economics of private renting, when undertaking viability assessments.

The mainstream market

The prime market attracts great interest, but it accounts for only around 15% of market supply. It should not be allowed to distract attention from the gaps that need to be filled, in all parts of the mainstream market, but particularly at less than £450 per square foot, where the volumes of unsatisfied demand are greatest.

More than 80% of Londoners outside the social rented sector can afford no more than £300,00 for a two bedroom flat (£450 per square foot). The average house price in London is currently around £425,000, according to Land Registry, but this is a mean average price that is skewed upwards by prices at the top end. The median average price is a better indicator of what ordinary Londoners can afford – this stands at £390,000 in Inner London and £275,000 in Outer London.

What will fill the gaps?

Most of the sites coming forward on the edge of central London are feeding into the lower end of the prime market and the upper end of the mainstream market. Areas located a few stops further out, such as Wembley, Stratford and much of Docklands, feed into the mid mainstream market, at between £450 and £700 per square foot. But the big question is which sites will boost supply in the sub £450 per square foot market.

More pipeline

Much of London’s supply pipeline is held in large sites in lower value markets that need investment in place to make them work. However, the scale of investment required varies considerably. Sites of up to 100 homes, close to tube stations, require much less investment proportionately, than sites of more than 250 homes.

Our analysis shows the potential for place improvement of areas across London – the darker colours on Map 1 indicate places where there is the greatest potential to unlock market capacity through investment – before adding in the catalytic impact of improved transport links.

Landowner return

A word of caution at this point – Community Infrastructure Levy works well to fund infrastructure and unlock sites, when it is set at an appropriate level that allows for a competitive return to both developer and landowner. Trying to deliver more housing by screwing down either or both of these is counter-productive, a point which is now recognised in national planning policy.

Taken from
Spotlight: London Residential Development: Where next? Feb 2013