Beds and sheds?

The London mayor introduced the new London Plan in 2016, and adopted it in 2021. When the ‘beds and sheds’ policy, supporting the co-location of residential and industrial uses, was written in 2016, the residential market was incredibly hot. There was a vast shortfall of new homes (and still is), but delivery was steadily increasing. 

Now, however, it’s going the other way. In fact, relatively few true mixed use sites where residential and industrial co-locate are coming forward. Instead, a number of sites previously earmarked for residential development are now remaining as industrial, representing a new dynamic in the land market. Overwhelmingly, these are in cheaper parts of London, where housing need is greatest and markets are most under supplied. The pendulum has swung in terms of values, but also in terms of planning policy and build complexity.

Minimal change in London residential land values 

London residential land values face downward pressure from rapidly increasing build costs, weaker house price growth and lower affordable housing values, particularly in Outer London. As residential development faces numerous planning and viability challenges, many landowners are delaying their decision to sell and increasingly considering alternative deal structures and competing commercial uses. This has further exacerbated the shortage of residential land supply in London.

Despite downward pressure on residential land values, the imbalance between supply and demand has stabilised land values in London. Central and Outer London residential land values fell marginally by 0.1% and 0.4% respectively in the six months to March 2022, taking annual change to 0% in Central London and -1.2% in Outer London. Meanwhile, greenfield land outside of London is seeing the strongest growth since 2014.

More recently, annual house price growth in London has lagged behind that of the UK; in the five years to Q1 2022 average prices grew 8% in the capital compared to 25.6% for the UK as a whole, according to Nationwide. Over the next five years, Savills are forecasting a modest 5.0% house price growth in London compared to 12.9% for the UK. As house price growth starts to slow, development costs are expected to continue to climb, meaning there is limited capacity for further growth in residential land values in the medium term.
 

We see policy inflation occurring. Residential developers have to contend with moving goal posts; the tightening of building standards and sustainability regulation (Future Homes Standard and London Plan, estimated to cost c.£11,000 per unit by 2026), tax changes (developer tax from March 2022) against the context of rapidly rising build costs. Material costs for new homes have increased by 22% in the year to April 2022, according to BEIS. This compounding of costs and added risks is challenging the viability of residential, meaning that developers are increasingly outbid by industrial. Sheds are easier and cheaper to develop, with a more straight forward build, and no affordable housing requirement.

London needs more new homes

But we still need more residential homes. Even at its peak delivery (London delivered 40,870 homes in the year to March 2020), this was over 10,000 short of the current London Plan Housing Target and less than half the 93,500 required according to the Government’s current calculation of Housing Need. And now delivery is falling. In 2020-21, net additional dwellings were down by 9.0% compared to the previous year. This a shortfall of 14,817 homes against the London Plan target. 

Planning is often cited as a major obstacle to delivery in many London boroughs. Planning consents in the year to Q1 2022 are 30% lower than Q1 2019, and private starts on site have been falling since 2015 as developers have reacted to a weakening new build sales market as well as a challenging policy environment. 16 out of the 32 London boroughs now face a planning sanction for not meeting their delivery targets, leading to a presumption in favour of sustainable development. This might help reduce planning uncertainty, and open up the opportunity for more residential development where it is needed most.