Housing has never been higher on the political agenda. The new Mayor will be under pressure to deliver solutions to the housing crisis and decades of undersupply, as demand for homes continues to rise and affordability pressures on buyers and renters mount.

However, a housing shortfall is not the only challenge the new Mayor faces. As a global city, London commands some of the highest office rents in the world as a result of high demand for workplaces in the capital. We are therefore not only suffering from a housing crisis but a real estate crisis where more affordable office space is also needed, if London is to continue to grow.

According to our latest analysis, we ought to be building 64,000 new homes a year, a 28% increase on our 2013 estimate of 50,000 new homes a year. The hike takes into account population growth and migration, as well as projected employment growth, on the back of London’s strong economic performance.

The residential demand equates to at least 55 million sq ft of residential, equivalent to 1.9% of existing stock per annum. This equates to 860 football pitches.

For commercial offices, based upon the latest estimates of office-based employment growth in London, we estimate an additional 4 million sq ft commercial office space is required every year, equivalent to 1% of existing stock, or three buildings equivalent to The Shard per annum. This expansion meets the increases in employment growth but there will also be a demand for new offices for companies looking to upgrade their existing space. Our estimate of demand, split between inner and outer London boroughs shows that a quarter of the additional office demand will be required in the outer London boroughs, but the current share of new offices in the pipeline, with certain timing of delivery, is only 7%, equating to around 2 million sq ft. This will and needs to increase as the new emerging outer London office locations become reality.

Our housing demand figure is above the Greater London Authority’s assessment of need which lies between 49,000 and 62,000 a year. However, with only 27,800 new homes delivered in the year to March 2015, actual supply is well short of any measure.

The biggest supply shortage is in the lower value markets, particularly for homes priced under £450 per sq ft (the equivalent of £270,000 for a small two bedroom flat). Our analysis of future supply against demand during the five years to the end of 2020 indicates that 36,500 homes will be delivered per annum across the whole of London, leaving a shortfall of 27,500 a year (Figures 1 and 2).

Rents in Central London offices have grown considerably through the current cycle. Prime rents have grown robustly since the economic downturn and as a result the differential between office rents in central locations and outer markets is the highest since 2007 (Figure 4).

^{Source: Savills Research}

Office demand

While we have seen rapid rent rises in central locations (City, West End or Docklands), the outer London market (everywhere else) has shown flatter growth. Some markets in locations that provide quick access to the financial and Government centres therefore remain affordable, prompting some businesses to relocate, particularly more consumer focused ones which are more sensitive to rising rents.

^{Source: Savills Research}

Beyond the centre

Regeneration and transport improvement can open up opportunities beyond the centre to bring forward new homes and employment space. As we explained in a previous report ‘Redefining Density’ last year, there is tremendous potential to make better use of land by building at higher densities beyond central London, particularly by developing close to transport nodes. Delivering a mix of uses: residential, employment as well as supporting retail and other social amenities is essential to achieve this aim and create great places.

In the shorter term, developers must navigate certain market challenges. Following 66% house price growth over the last ten years, the London residential market has been softening. Volumes of sales of prime new homes slowed following the reform of Stamp Duty Land Tax (SDLT) in December 2014, the announcement of a tapering of mortgage tax interest relief from 2017 and the introduction of a 3% surcharge on SDLT on investors and buyers of second homes in April this year.

The volume of sales of new homes have slowed most in the Mid Mainstream market (£450psf- £700psf) and the Lower Mainstream market (sub £450psf) due to a lack of available stock.

Affordability pressures have also been growing, despite lower mortgage rates, with the average deposit for a first time buyer now at £77,000. Home buyers have therefore been looking further afield for value. Over the past 12 months outer London boroughs have seen the largest price growth, with Enfield, Hillingdon and Lewisham recording increases in value, ranging from 17% to 20%. We expect this to continue and forecast that boroughs outside the centre which have not seen such strong price growth over the last 10 years will see significant growth over the next five years.