London is a hugely attractive place to live, to work and invest in. 
It is a dynamic city, and it is growing. Prime London, too, is expanding.

In the new build market we would have applied ‘prime’ to only the two most central boroughs – Kensington & Chelsea and Westminster – just as recently as ten years ago. Today new build development in the surrounding boroughs, as well as most of London’s riverside, has become prime.

But there is a larger development pipeline coming through over the next five years, which raises the question of whether the expansion of the prime market can keep pace with developers’ expectations and what the developments need to deliver to achieve or maintain prime status.

Building at scale

To put this into context, we expect 22,700 new homes (private) to be priced at more than £1,000psf.

Large scale development is taking place in clusters outside of established prime, in Nine Elms, South Bank, City Fringe, Earls Court and White City, reflecting the fact that development land in the very centre of London is limited. In addition, in Canary Wharf, a strong employment centre with Crossrail arriving in 2018, residential development is being intensified.

Click Map 1 below to enlarge

Placemaking and transportation

It is clear that previously disused or run down industrial areas can become vibrant new neighbourhoods through successful placemaking. The early stages of regeneration are often the most important in attracting attention to an area and gaining footfall, marketing and branding can play an important role. This can be done by ensuring the retail, public realm or open spaces are delivered upfront in the pipeline, and public connectivity between buildings is created. This has been particularly successful at Kings Cross.

Good transport links are also crucial; Canary Wharf didn’t fully take off until the Jubilee Line Extension opened. Public sector investment can accelerate regeneration substantially, and has played a central role in facilitating growth in a number of these clusters.

Responding to change

Expansion into these areas also reflects the fact that London’s key business districts are changing. There is an increasing focus on peripheral office locations, such as in the case of the City, which is seeing some expansion of activity to Old Street – ‘Tech City’ – and south of the river to Waterloo and London Bridge. Similarly, the West End has its fringe locations, including Hammersmith to the west and Kings Cross to the north. Notably, office based employment forecasts are stronger in these peripheral locations as they create new employment hubs alongside the more established areas.

Delivering value uplifts

Residential developments in these emerging prime areas each justify their values through offering the very best in services and amenities that a buyer of prime new build property has come to expect. Coupled with waterside views, or the excitement of large scale regeneration, this has supported strong off plan sales. However, while an average £1,000psf+ is justifiable in these peripheral locations, this equates to a large capital value on oversized units. As new units compete with 
more established prime London product, it may take longer for the market to absorb.

Overseas investors in particular have been driven by the strong capital growth seen in prime London since the downturn. It is unsurprising then that our research suggests that rental yield is not the main driver behind purchasing investment property.

But this will be tested over the next few years as we see large concentrations of new prime stock come to the market for rent. Out of the 22,700 prime new homes we expect to be delivered in the next five years, we estimate that in the region of 13,000 homes could enter the rental market.

Rental impact

Competition for tenants will become particularly pronounced in new build towers, where construction and completions cannot easily be phased to allow for market absorption. Consequently, rents will come under pressure in locations of high supply, with a potential dampening effect 
on rental growth across the wider prime rental market despite a wider pool of tenants.

Domestic buyers

In light of this, developers should not underestimate the importance of domestic buyers purchasing for their own use. Importantly, we are already seeing a shift towards more UK buyers as domestic demand is recovering, partially to be accredited to the Mayoral Concordat.

Developers are starting to regain their trust in the domestic markets by launching in the UK either before or simultaneously to overseas and it is positive that UK buyers are willing to purchase off plan. In the first half of 2013, UK purchasers of prime new build accounted for 28%, while in the first half of 2014 this had increased to 39%. This can only be good news.

High volumes of residential homes are in the pipeline in these emerging prime locations. Construction is already underway at most, but it will take time for these neighbourhoods to become fully occupied.

Taken from
Spotlight: Prime London Residential Market - Autumn 2014