LONDON PRIME RESIDENTIAL PIPELINE 2016
Prime housing has been instrumental in lifting London’s residential and construction markets out of recession. In recent years, investors from all over the world have taken a shine to the capital’s real estate market, taking it towards unprecedented levels of growth. Although London remains a magnet for developers and investors alike, the market has matured significantly, requiring development opportunities to be carefully selected.
In recent years the shortage of high quality, ‘fresh out of the box’ luxury homes in central locations, coupled with favourable exchange rates, made for a heady mix that investors simply could not resist. This resulted in huge price hikes right across the capital’s prime market. In some areas values have accelerated up to fifty percent. However, while planning and development have continued to surge ahead in light of these trends, the market is evolving. Successive tax tinkering has had a big impact on the very top of the market and its effects are not just felt in prime but in every area of the market. Developers will now need to be more agile if they want to ensure the right margins. One feature of the recent ‘boom’ years was sales values steadily outstripping construction price inflation. However, higher stamp duty charges – combined with other tax reforms and global economic uncertainty – have turned the thermostat down on buyer demand, while construction costs are now rising faster than before.
Significantly, the issues facing the London market are potentially playing into the hands of other cities across the country. Birmingham and Manchester, in particular, are coming up on the rails as developers and investors - boosted by the more affordable land values and the government’s long-term infrastructure commitments - are looking to alternative locations for prime residential investment. The question we pose this year is – how can developers and investors turn a maximum profit in a market that keeps changing? What are the consequences of rising costs and easing demand? And, crucially, where next for the prime residential market?
Successive tax tinkering has had a big impact on every level of the market
EXECUTIVE SUMMARY •
The amount of ‘prime’ homes due for construction in London over the next ten years is expected to hit over 35,000 with a total sales value of more than £77 billion
•
The Chancellor should scrap extra stamp duty on homes above £1 million and, instead, use the planning process to secure an enhanced level of affordable housing
•
Chelsea & Fulham is the most popular location, followed by the regeneration areas of the Southbank and the City and fringe
•
•
The combined floor space of these properties would eclipse the entire City of London
Although market conditions are changing and there are fears of an over-supply at the lower end of prime, opportunities exist in mixed use and mixed tenure developments
•
Significant growth likely to be seen in British regional economies as major infrastructure commitments, population and employment growth drive prime demand
•
Market will recover when sales values rise relative to construction inflation between 2018 to 2020.
•
•
Despite initially encouraging investment to stimulate wider growth, the government has changed policies mid-cycle, stemming buyer demand and, consequentially, hurting affordable housing allocations Stamp duty, in particular, is becoming more of a tax on development than purchasing with ‘stamp duty paid’ deals impacting margins
1 Palace Street 10 Trinity Square 100 Piccadilly 100 West Cromwell Road 102 Jermyn Street 103-109 Wardour Street 11-15 Grosvenor Crescent 119 Ebury Street 119-122 Bayswater Road 1-3 Grosvenor Square 135 Grosvenor Road 151-161 Kensington High Street 17-35 Craven Hill Gardens 1-8 Clarges St, 82-84 Piccadilly and 29 Bolton Street 18-19 Buckingham Gate 185 Park Street 19 Queen Elizabeth Street, Butler's Wharf 190 Strand 19-27 Young Street 195 Warwick Road 20 Blackfriars 20 Grosvenor Square, W1 213-215 Warwick Road 22 Grosvenor Square 22 Tower Street 24 Buckingham Gate 257 City Road 26 Chapter Street 30 Old Burlington Street 31-36 Foley Street 35 Marylebone High Street 36 Park Street 36 St John's Wood Road 375 Kensington High Street 38 Hyde Park Gate 38-44 Lodge Road 38-62 Yeomans Row 4-5 Queen Street, Mayfair 406-408 The Strand 4-16 Artillery Row 48 Carey Street 5 & 6 Connaught Place 50-57 High Holborn 52-57 & 8-16 Princes Square 55 Broadway 55 Hans Place 55 Victoria Street 56 Curzon Street 60 Sloane Avenue 61 Oxford Street 62-68 Rosebery Avenue 66 Chiltern Street, W1 74-76 Chiltern Street 88 St. James Street 9 Marylebone Lane 90-93 Piccadilly (formerly In and Out Club) 9-10 St Mary at Hill Abell & Cleland House, Westminster Allen House Amberley Waterfront Apartments American Embassy, W1 Arundel Great Court Barts Square - Phase 1 Barts Square - Phase 3 Battersea Power Station Phase 1 Circus West Bishopsgate Goods Yard (part only) Bolsover Street Brewer Street Car Park Cale Street Cale Street Centrepoint Chambers Wharf (part only) Chelsea Barracks , SW1 Chelsea Island Cleveland Row and Russell Court Confidential - West London Lancer Square Newcombe House Redevelopment Audley Square Redevelopment 39 Hill Street, Mayfair 77 South Audley Street 1-5 Grosvenor Place 4 and 5 Queen Street Oxford House Portland House Nova Kings Gate Confidential - Victoria Covent Garden Estate - Various Crossrail Tottenham Court Road, 91-101 Oxford Street Dudley House Dukes Lodge, Holland Park Earls Court Masterplan Eastbury House, 30 Albert Embankment Elizabeth House, Waterloo Embassy Gardens
PROJECT NAME
SHORT TERM (2015-2018)
MEDIUM TERM (2019-2021)
LONG TERM (2022-2024)
35,000 HOMES
TOTAL UNITS
Fitzroy Place Former Holland Park School, Airlie Gardens Former TA site, 245 Warwick Road Furnival House Glebe Place Goodman's Fields Great Minster East, Marsham Street Great Minster House North Great Portland Street Grosvenor Gardens House Hamilton Grove Hampton House, 20 Albert Embankment Harrow Road Heron Plaza Hertsmere House Hortensia Road Hurlingham Gate Hurlingham Retail Park Hyde Park Barracks John Lewis Clearings Site Kensington Park Road Kings Road Fire Station Knighton Place Knights House Leinster Square Lillie Square, SW6 London Dock London Fire Brigade HQ, Albert Embankment (part only) Lots Road Power Station Marble Arch Tower Merchant Square Buildings 1 & 6 Moxon Street North Kensington Sports Centre North Wharf Gardens - Phase 1 North Wharf Gardens - Phase 2 Odeon Kensington One Blackfriars One Nine Elms One Tower Bridge Pall Mall, St James's Park Crescent Parker House Parker Tower Principal Place, E1 Project London: Fulham Wharf Rathbone Place Regents Gate Riverlight (part only) Riverwalk House Royal Mint Street South Kensington Telephone Exchange, Draycott Avenue South Kensington Underground Station South Quay Plaza, 183-189 Marsh Wall Southbank Place, Waterloo Southbank Tower St Dunstan's House, Fetter Lane, EC4 St Edmunds Terrace St John’s Wood Barracks Sugar Quay Old War Office (57 Whitehall) The Parabola, Kensington/Holland Green, Kensington High Street (The Commonwealth Institute) The Solitaire, 158 Brompton Road, SW3 Tottenham Court Road Trenchard House 19-25 Broadwick Street Vauxhall Bondway Vauxhall Cross Vauxhall Sky Gardens Vauxhall Square Vicarage Gate Walton Street Police Station 103 - 109 Wardour Street Westbourne House, Westbourne Grove 13-16 Jacobs Well Mews The Stage Soho Works Estate Bankside Quarter Fielden House Old Queen Street 20 Poland Street 6 John Street 101 Prince of Wales Drive Ransomes Wharf 24-30 West Smithfield Palace Wharf Aykon Nine Elms 22-29 Albert Embankment 33 Horseferry Road Ten Broadway (New Scotland Yard) Royal Mail Sorting Office 33 Greycoat Street 54-57 Great Marlborough Street Alpha Square HSBC Pension Fund West End Green Bayswater Project 29 New End Millbank Tower 16,947
9,622
8,486
77 BILLION SALES VALUE
DEVELOPMENT CONTINUES TO SURGE AHEAD The market has cooled in recent months with some developers reporting a slowdown in sales and enquiries. In spite of this, the development pipeline has surged ahead 40 percent since last year with over 10,000 additional homes now planned for construction. A major reason for this has been the continued attraction of prime London new build to a wide range of international investors. Developers from the likes of Malaysia, Hong Kong, USA, India and UAE, as well as the UK, have entered the market acquiring sites later in the cycle to bring forward new schemes with revised and intensified levels of development. Many of these are now forecast to complete between 2019 and 2025.
In terms of timings, we predict a two-year peak in the number of new prime homes being completed in 2017 (5,414) and 2018 (5,130). At this point, construction will have completed on just under half of the total number of homes currently planned, leaving a staggering £36 billion worth of property still to be built. Given the amount of development remaining and the possible need to re-configure the product mix in response to the current market dynamics, it is conceivable that the some projects could take longer to be completed.
Homes per year 2014 versus 2015 index 6000 5000 4000 3000 2000 1000 0
2015
2016
2019 2017 2018 Homes per year 2014 index
SHORT TERM (2016 - 2018)
16,947 Homes
48%
2022 2020 2021 Homes per year 2015 index
MEDIUM TERM (2019 - 2021)
9,622
Homes
28%
2023
2024
LONG TERM (2022 - 2025)
8,486
Homes
24%
Pipeline Volume
Pipeline Volume
Pipeline Volume
£41 Billion
£22 Billion
£14 Billion
Sales Value
Sales Value
Sales Value
Our pipeline is based on a snapshot analysis of new private residential projects being built or planned for delivery in central London through to 2025 with an average sales value greater than £1,350/ft2. Given the complex nature of planning, funding and phasing the delivery of these developments, estimating the delivery dates of schemes is not an exact science. However, by producing a theoretical timeline, we are able to discuss the headline trends and shape of the ten-year pipeline.
MAPPING OUT LOCATION The exclusive west London postcodes of Chelsea & Fulham are currently proving the most popular areas of the capital. Here, almost 11,000 new luxury homes are planned with a sales value of around £20 billion. This figure, however, is heavily influenced by the future regeneration of Earls Court which represents around two thirds of the planned development in the area, and for which the programme is currently being reviewed. In the main, however, the concentration of new build activity has been focused on emerging locations. These areas are outside the traditional ‘golden postcodes’, where developers see potential for house price growth fuelled by regeneration schemes creating improved business links, social and retail amenities and, critically, new transport infrastructure.
One such area is the Southbank where continuing transformation has seen the area swiftly establishing itself as London’s third major business district. Here, the value of prime residential development has reached £14 billion, up 37 percent on 2015. Likewise, in the City and fringe the ‘tech city’ revolution coupled with new Crossrail stations is proving a growing draw for investment. The total number of homes planned in these areas has seen a 40 percent increase on last year.
KEY Chelsea & Fulham - 10,914
Bayswater & Paddington - 933
Southbank - 8,863
Mayfair - 589
City & Fringe - 5,898
St. John’s Wood - 427
Victoria & Pimlico - 1,960
Belgravia - 401
Midtown - 1,754
Knightsbridge - 343
Docklands - 1,600
Marylebone - 252
Kensington - 1,104
Hampstead - 17
17
427 252
933
589 401
1,104
10,914
1,754
5,898 1,600
343
1,960
8,863
DIFFERENT GRADES OF LUXURY AVOIDING THE SQUEEZE IN A CONSTANTLY CHANGING MARKET
When it comes to types of home, in terms of sales values, over two thirds of new build prime properties are now valued between £1,350 - £1,750/ft2 with a further 21 percent valued between £1,750 -£2,250/ft2. This demonstrates that the bulk of the units are at the bottom end of the prime market.
By contrast, we have seen very low rates of growth in the number of super prime and prime in more central locations such as Kensington, Knightsbridge and Belgravia. This reflects the higher land values in these areas, coupled with a typically smaller average size of development. In comparison to fears of over
supply at the bottom end of prime, there still appears to be opportunity for smaller and differentiated boutique schemes at the top end of the market in excellent locations.
Looking ahead, we predict that the financial viability of prime residential development will be under pressure for the next two-to-three years. During this period, construction costs are forecast to rise faster than sales values, making further erosion of developers’ margins a possibility until values for prime property recover. This is forecast by several leading agents to be between 2018 and 2020.
Number of units per sales band 2014 vs 2015 25000 20000 15000
Units per year 2014 index
10000 5000 0
1,350 -1,749 Number of units 2014
1,750 -2,499 Number of units 2015
>2,500
Our view, supported by conversations with several clients, is that because of the disparity between construction prices and sales values, it is likely that developers of prime residential will now need to find at least 10 percent cost savings to achieve their desired internal rate of return and remain viable.
In addition, we are also seeing strategic reviews being carried out on a number of projects. This is in order to refine the proposed product mix and unit sizing to reflect the changing purchaser demographics of a market which now has a greater focus on owner occupiers and domestic home buyers. In the current climate, the development control process needs to be stronger than ever before. Fully exploring the relationships between costs and value is vital when it comes to both creating fundable schemes and securing the best possible returns. Given a blank sheet of paper, our recommendation is to work backwards from a sales aspiration target when shaping a scheme, but the inevitable reality is that developers are challenged by having to deliver more for less.
In our view, more innovation in procurement practice is needed as some clients can no longer afford the multiple layers of back-to-back risk pricing passing through the supply chain to a main contractor. Clearly, smarter approaches than ever before are needed when it comes to managing value creation and optimising the technical elements of buildings, such as the mechanical and electrical services and infrastructure, in order to help developers ‘beat the market’ and stay viable.
COST PRICE GROWTH VERSUS VALUE GROWTH market recovery 40 35 30 25
Percentage change index
Design and build has been the predominant form of procurement and delivery in the prime residential market in recent years. However, many of these successful projects were secured under contract prior to the rebound in market prices in 2014. Since that time, developers have found it increasingly expensive to pass delivery risk to the point at which the viability of projects is being threatened.
20 15 10 5 0 -5 -10
2012
2013
2014
2015
2016
2017
2018
Arcadis TPI % annual increase
Arcadis TPI cummulative
Savills cummulative index
Annual capital growth %
It will not be until 2018 that capital values will start moving ahead of build costs, suggesting a window of recovery for the prime new build market between 2018-2020.
2019
2020
TAXING TIMES FOR PRIME PROPERTY IN THE CAPITAL The government initially encouraged investment in the prime housing market as a means to stimulate economic growth. However, since then, it has changed its policies mid-way through a development cycle, raising taxes to fend off voters’ concerns over rising house prices and a consequential lack of supply for British families. The ongoing catalogue of far reaching tax reforms and fiscal regulations have made the UK a more expensive and complicated market in which to invest. Not only has this impacted many large developers who have already committed significant funds, but it also risks a downward spiral of less affordable homes being built and supplied elsewhere, defeating one of the core purposes of the reforms.
Since the end of 2014, significantly higher stamp duty rates have been introduced for transactions at the high end of the market. On top of this, as of April this year a punitive, additional three percent surcharge on second home ownership was introduced. This rate now applies to all buyers regardless of where they are from or the whether or not they are purchasing through a company structure, and have proven damaging for the central London prime market. Certain parts have virtually ground to a standstill as a result. Many homes in this bracket with an average value of between £4-£5 million have seen the stamp duty levy increase by over £150,000. While for those intending these properties as a second home, the levy has grown by around £275,000. This increase alone is well over the average house price in the UK.
Wider tax increases have also created problems. Initially observed as unlikely to dampen investors’ appetite for prime property, the increasingly convoluted and expensive regime has since been met with global currency devaluations, shocks in the stock market and falling commodity values. PwC observe that the British property tax system is also now the most ‘complex’ in the world, endangering London’s reputation as an investment haven. The full impact of the government’s tax tinkering is still unclear. Nevertheless, a convoluted tax system and the spectre of further possible changes is, undoubtedly, in danger of undermining confidence in a market that previously attracted investors off the back of its track record for political and financial stability.
Tax Tinkering – a chronology
April 2013 15% stamp duty rate imposed on purchases by ‘non-natural persons’ (corporate entities)
April 2014 Replacement of the stamp duty ‘slab’ system seeing a higher tax burden on properties at the top end
April 2015 3% stamp duty surcharge on all second property purchasers
April 2017 Removal of permanent non-domicile tax status for those living in the UK more than 15 of the last 20 years
May 2019 Full transition to taxing landlords based on turnover rather than profit
Introduction of tax on ‘enveloped dwellings’ valued over £2m. Capital gains tax introduced for AETDs at 28% on gains
March 2014 Tax free period reduced when converting a main residence into an investment property
December 2014 Expansion of the ‘enveloped dwellings’ tax rules to cover properties valued at over £1 million and also over £500k from April 2016
April 2016 Capping of mortgage interest tax relief down to 20%
April 2017 Capital gains tax payable on profit of the sale of property within 30 days
April 2020
STAMP DUTY CHANGES ON PRIME PROPERTY £43,750
£363,750 £273,750
£73,750
£40,000
£210,000
£1m
£3m
PROPERTY PRICE
PROPERTY PRICE
£663,750 £513,750
£1,413,750 £1,113,750
£350,000
£700,000
£5m
£10m
PROPERTY PRICE
OLD RATE - PRE 4 DECEMBER 2014
PROPERTY PRICE
NEW RATE - PRIMARY RESIDENCE
NEW RATE - SECONDARY RESIDENCE
Homes in £4-£5 million bracket have seen the stamp duty levy increase by as much as £275,000
THE UNINTENDED CONSEQUENCES OF TAXING AT THE TOP Several industry experts have commented that the government has overshot its mark by taxing the upper end of the market too severely at 12 percent. The higher rates of stamp duty on prime properties under the new slice system came at a time when the market was already suffering from falling off-plan sales and rising construction costs. Despite fears of an over-supply of prime properties in London, the reforms have inadvertently exacerbated an excess of properties at the top end of the market by increasing the total costs involved in purchasing them. The inevitable stand-off which has resulted between purchasers and sellers has induced a level of anxiety in the development and finance markets that is not conducive to stimulating further new build. This means there will be less in stamp duty receipts to the Treasury, and
fewer affordable homes being delivered across the London market, potentially aggravating the well-documented housing crisis. Home ownership is one of the most important levers of social mobility. However, if the purchasing process is too costly for prime property, wealthy homeowners are less likely to buy upwards. This, in turn, leaves no room for middle-income buyers who also wish to climb the ladder or the lower-income buyers beneath them in the chain. In the medium term, the result of this stagnation is fewer transactions going through and prices increasing further as supply continues to outstrip demand.
Another flashing light on the dashboard is that of the mid-market. With stamp duty growing rapidly at the highest price brackets, there are also signs that those looking to invest in residential property are now beginning to acquire properties valued around the ÂŁ1 million to ÂŁ1.5 million mark. This rush to market is at risk of causing something of a distortion. Developers are now being forced to focus on building more one bedroom flats and fewer family homes in order to keep purchase prices below the magic ÂŁ1.5 million threshold. Furthermore, the choking effect of the new higher stamp duty rates is leading, in some cases, to delayed or cancelled starts for new build prime developments. Consequentially, the badly-needed affordable housing contribution made by these schemes is also cancelled out. Meanwhile, fear also exist that landlords will also just simply increase rents to offset the impact of the reforms, making the capital even less affordable for renters.
The choking effect of the new higher stamp duty rates is leading to delayed starts and putting affordable housing contributions at risk
OSBORNE’S HAIRCUT FOR DEVELOPERS The key issue with stamp duty is that it has to be paid with cash. In a buyers’ market of dipping asset values, many developers – particularly those of larger schemes – who cannot merely wait for the market to shift are particularly under pressure to offer incentives such as ‘stamp duty paid’ in order to secure sales. The end result being that stamp duty is increasingly a tax on developers rather than buyers. Assuming the extra cost of the new stamp duty rates are discounted from the sales prices, as agreed on many new build schemes, we estimate the charges take a serious chunk out of gross development values and developers’ margins.
Prime London Developments Scheme of circa 240 apartments at a sales value of £1600/ft2
4%
hit on margin
£9m
extra stamp duty
All units sold off-plan to investors
Super Prime London Developments Scheme comprising circa 70 apartments at a sales value of £4000/ft2
7%
hit on margin
£36m
extra stamp duty
All sold to second home owners or investors
The potential erosion to gross development value and margins linked to stamp duty discounting is now a significant issue for developers, especially when considered in combination with unforeseen increases in construction costs. The overall result of this is a potential double whammy for developers to navigate in their appraisals. There is also a risk that higher stamp duty charges could result in exponential downward impact on values, as price-sensitive investors sit out the cycle and wait for the bottom of the market prior to purchasing.
To ensure a buoyant housing market across the board, a reduction in the top rate of stamp duty must be imposed to release pressure on developers who have committed to land purchases under the coalition government and prior to December 2014. Alternatively, the Chancellor should scrap the extra stamp duty costs on new build schemes and, instead, negotiate directly with developers for a higher direct affordable housing contribution at a more viable level. This would avoid frightening developers and investors away from the London market, holding back regeneration and badly-needed affordable housing supply.
WHERE NEXT FOR DEVELOPERS? Developers need to be nimble and turn the difficult market to their advantage. Given the fears expressed about a potential over-supply of prime London homes and recent anxiety that investors may walk away from deposits on new build projects, we may see changing patterns over the coming months and years.
‘Flight to quality’
Mixed use
Large-scale, multi-unit schemes have boomed at the lower end of prime, while the pipeline for new build above £3,000/ft2 has remained quite flat. Overseas developers, in particular, may prefer to invest in small to medium sized projects with fewer units in higher value locations where supply is lower, such as Kensington, Knightsbridge, Mayfair and Marylebone.
Developments close to stations and transport hubs have big potential. Combining prime residential with retail and grade ‘A’ office space – we forecast continued growth in the pipeline at Canary Wharf, Paddington, Victoria and Hammersmith locations where new transport infrastructure is gathering pace and values are increasing between 25 and 30 percent.
The new £1million neighbourhoods According to Oxford Economics, the sheer pressure of population growth will see London house prices double by 2030. We predict that areas in London where flats are currently valued at less than £1 million, and houses under £2 million, will be the next areas for prime development. We expect to see growth in locations such as Camden, Kentish Town, Maida Vale, Clapham, Canada Water, Wapping and Old Oak Common.
Outer London Boroughs and commuter belt Acute under supply of housing will increasingly mean that Outer London Boroughs and commuter towns will have to absorb the population overspill from Central London. This will see prices grow substantially. As a result we expect additional growth in locations such as Wembley, Stratford, Croydon, Brent Cross, Cricklewood, Tottenham Hale, Havering, and Abbey Wood.
In essence, the medium-term impact of growing costs for prime residential property will see developers target locations where buyers can get more ‘bang for their buck’. This is particularly the case with homes in the sub £1,000/ft2 bracket with a greater variety of tenure. Such a move may bring developers more closely into direct competition with house builders, or encourage more joint venture working.
EXPANDING HORIZONS With some investors finding themselves priced out of the traditional London market, the UK’s regional markets are fuelling opportunities for development, with the likes of Manchester, Birmingham, Leeds, Bristol, Edinburgh and Glasgow coming into sharper focus. Institutional investors have seen the attraction of these locations in terms of accessible land values, capital growth and yield. The British government’s commitment to improving connectivity, including the likes of HS2 and HS3, are breathing renewed confidence into regional markets, such as Manchester and Birmingham. Businesses are being encouraged to locate operations in these less expensive areas that offer improved prospects and infrastructure. In turn, the growth in business interests is driving population growth and an increase in demand for housing in prime regional city locations valued between £300/ft2 to £475/ft2.
The real game changer that will accelerate future regional growth is the move to fiscal devolution deals across the UK. Devolved combined assemblies are empowered to take control of collecting business rates and co-ordinating the spatial planning and infrastructure priorities across their regions in line with a common economic development plan. So, too, will enterprise zones create clustering opportunities for businesses, along with improvements in amenities, social infrastructure, education, health and housing.
Areas of opportunity Midlands Engine West Midlands Combined Authority region The Northern Powerhouse Manchester, Liverpool, Leeds, Sheffield and Hull West of England City Region Bristol, Bath, North Somerset and South Gloucestershire Oxfordshire and Cambridge
London
WHAT DOES 2017 PROMISE FOR PRIME? The challenges facing developers have risen over the last twelve months. The market has flattened considerably as demand from overseas purchasers has waned and successive rises in stamp duty have hit hard. Taken within the context of a June referendum on EU membership, all of this combines to ‘frighten the horses’ and a period of inertia has set in.
2017 prime predictions Slowing pipeline growth in 2017 caused by market uncertainty and a potential Brexit Growth in City and Fringe, Canary Wharf and prime outer London to continue at pace Strategic reviews of projects leading to re-positioning of product mix aligned towards owner occupiers and smaller apartments below £2m A renewed focus on cost reduction, leading to reduced basement and amenity provision where business case is marginal Programme reviews for larger schemes linked to deferred delivery, phasing of build and re-financing Shifting moods in procurement attitudes among developer clients away from simple ‘one size fits all’ two stage design and build procurement Clients becoming increasingly open to more hands-on control of risk and supply chain relationships in order to optimise price Increase in joint venture partnerships between developers and house builders to access supply chain and spread risk Continued trend towards mixed use development including offices, hotels and retail Increasingly polarised market with well-located, smaller boutique prime / super prime schemes and build to rent becoming preferred assets Possible re-awakening of the Asia capital markets in the event of post-Brexit devaluation of sterling.
Following six-to-seven years of unprecedented growth, it appears the market has reached the mid-point of the pipeline delivery cycle and the government has acted to stem this in order to quell fears over a prime London asset bubble crash. Ironically, the high levels of taxation brought in at the top of the market now threaten to drive a flood of vendors into the city’s mid-market, depriving families of more affordable housing stock in the suburbs, while simultaneously precipitating the risk of a glut of prime London homes valued above £2 million languishing on the market and creating distressed assets and investors. Several developers detected some time ago that the ‘cheese was moving’ in London and have responded accordingly. Some are now actively pursuing mixed tenure schemes and mixed use developments located in outer London locations, the commuter belt and other regional cities where the mainstream UK owner occupier is the target. Other developers have remained focused on building out their committed projects in the prime central locations and responding to shifting market need by refining their product mix, specification, delivery programmes and sales strategies.
Without a cut in stamp duty, the next few years are likely to see slower growth in the prime London market. Against a background of low transaction levels, we may also see more developers delay bringing forward projects and regeneration schemes that would, in turn, benefit London’s civic amenity, create jobs and aid the City’s competitiveness. In the meantime, the current squeeze on viability and the imbalance between construction costs, sales values and higher transaction costs, coupled with concerns of over supply in some locations, suggests a period of adjustment. We expect recovery in the prime central London market will come about once sales values, as predicted, rebound again between 2018 to 2020. Until this happens, we expect the lion’s share growth to be centred around the fringes, prime outer London and in certain regional economic centres.
Some are now actively pursuing mixed tenure and mixed use schemes in outer London locations and the commuter belt
CONTACT
Mark Cleverly Head of Commercial Development T +44 (0)7736 900 211 E mark.cleverly@arcadis.com
www.arcadis.com/uk @ArcadisUK Arcadis United Kingdom
9627AUK