The increase in London’s prime supply pipeline is unprecedented. Over the next five years, we forecast that, on average, 8,500 new build homes above £1,000psf will be physically completed every year. That’s three times more than the annual average over the last five years, and nearly double the number of completions during the 12 months to Q2 this year. However, completion figures do not paint the full picture of the prime development market; the pipeline is best understood by also looking at sales and construction starts.

With more than 6,200 exchanges of prime new build homes over the last 12 months in London, new build activity at the top end has held up in an uncertain market. This is the highest number ever of £1,000psf+ sales in the London development market and 8% higher than the peak of 2013. This contrasts with the more domestically driven prime secondhand market, which has felt the effects of taxation changes and mortgage regulation.

Despite strong off-plan sales in the prime new build market, starts continue to outpace sales. As a result, there remains a large pipeline of unsold homes yet to complete. The number of starts increased significantly between 2014 and 2016, as many tower schemes that cannot be phased began construction. This meant that in 2016, nearly two units were being started for every home sold. Looking forward, unless sales increase from their current levels, there will be more practically completed and unsold homes on the market. This is an important consideration for developers’ expectations of future sales rates.

However, there are mitigating factors which could reduce future prime residential supply. First, during the last year, the annual number of starts reduced to 8,000 units, down from the peak of 11,000 seen during 2016.

Second, there is a growing trend by pragmatic residential developers to diversify into alternative asset classes.

Large-scale residential developments that are phased have the ability to deliver future phases as commercial office units, serviced apartments, retirement housing (see Living the high (retirement) life) and, to a lesser extent at the top end, build to rent.

Battersea Power Station has already exercised this option, choosing to hold on the delivery of the residential element in the next phase and focus on delivering the 1.2 million sq ft of office and commercial space.

New homes in London are being purchased closer to their practical completion (PC). Our data shows that, in 2014, the average length of time a prime new build property was bought off-plan was 2.9 years pre-PC. By 2016, this was down to 1.9 years. During the first half of 2017, the average reduced to just over a year. More recently in the new build market above £5 million, buyers have been more focused on completed units as buyers at the top end prefer homes that are ready to move into. Just 25% of £5 million+ new build sales were of completed units in 2016. During the first half of 2017, this proportion increased to two-thirds of sales.

With more properties available upon, or closer to, completion, the profile of buyers is changing in the prime new build market. Owner occupiers (whether downsizing or purchasing for a main residence, a second home or a weekday pied-a-terre) tend to feature more heavily closer to practical completion.

In previous years, buy-to-let investors have been an important source of demand for the new build market. These buyers are often prepared to purchase off-plan, enabling developers to unlock the development finance required to commence construction. However, investors, particularly those with mortgages in the UK, are facing more stringent mortgage regulations and taxation changes.

London has experienced an uptick in overseas investors, but, contrary to popular belief, the majority of overseas-bought stock is occupied. The GLA’s recent study found less than 1% of new homes were left unoccupied on a long-term basis.

While international buyers may also face the difficulties mentioned above (depending on how they procure finance), those buyers who are willing to take a long-term view and believe in the fundamentals of London as an attractive place to invest, could benefit from favourable currency movements.

There is little doubt that the prime development market is evolving. Flexible developers are exploring new uses and new buyers are enjoying the tangibility of completed homes.