The BtR sector underpins London’s recovery

London’s development market has continued to bounce back, reflecting the recovery of both domestic and global economies post-pandemic. 2022 has started well with 6070 new homes sold in the first quarter according to Molior, who track developments with more than 20 private homes (large sites), the highest quarterly figure since early 2018. Quarterly starts on site are up by 16% across London, indicative of a high number of BtR ‘sales’. Despite starts heading in the right direction, there are now only 57,063 homes under construction on large sites in London. This remains -8% below the pre-pandemic average (2015-2019), suggesting the supply of housing will remain below target.

Mainstream starts and sales rise whilst completions fall

Starts in the mainstream market (below £1,000psf) have continued to bounce back and are up by 15% in the last quarter. They are 2% higher than in Q1 2020, however trail the 5 year pre-pandemic average (2015-2019) by -24%. 

Sales in the mainstream market have remained robust into 2022 and are up 6% on last quarter. In total, there were 16,850 mainstream sales in the year to Q1 2022, a fall of -1% on the pre-pandemic average (2015-2019). 

However, there are a number of headwinds facing the mainstream sales market, with rising interest rates and record levels of inflation, and developers facing the end of Help to Buy imminently. Whilst there is no clear replacement for Help to Buy in London, Build to Rent, and other intermediate tenures, are expected to fill some of the gap.

Annual mainstream completions have increased by 2% in the year to Q1 2022, however are behind by -27% on pre-pandemic levels.

Despite Prime starts and sales increasing, the pipeline of homes continues to shrink

Prime (above £1,000psf) starts have regained their momentum following the pandemic, with Q1 2022 figures up 19% on the previous quarter. This is down to two large site starts which, together, account for over 1,000 homes. 

 In the year to Q1 2022, prime sales reached  4,197. This is a quarterly increase of 45% and an annual increase of 38%. This strong quarterly performance is reflective of a large number of BtR sales over £1,000psf. Despite those, prime sales are still -19% behind the 5 year pre-pandemic average (2015-2019).               

Although quarterly sales are significantly up, inflated by a small number of large BtR sites, the recovery of London’s prime market may be stifled as the war in Ukraine continues to knock investor sentiment and drive inflation to record levels. Whilst global travel continues to reopen, the speed and velocity at which Asian buyers will return to pre-pandemic levels remains questionable. 

Completions in the prime market are down 5% on last quarter, however are 23% up on this time last year. Despite the disruption to construction over the past 2 years, completions are only -5% behind the 5 year pre-pandemic average.  

Tall buildings are getting smaller and scarcer

There are signs of a slowdown in the number of buildings with 20+ storeys coming forward, with starts in 2021 down 44% since the 2017 peak. A fall in starts is consistent with the decline across the London residential development market, with the total number of homes started on sites dropping by -39.2% between 2017-2021. Where schemes are coming forward, they are tending to have fewer storeys (fig.3). 

This trend is to be expected as we enter a post-pandemic era characterised by severe supply chain disruption and rising build cost inflation. Combining these factors with an increasingly stringent regulatory environment will inevitably impact the viability of such schemes and therefore undermine the future pipeline of tall buildings.  

With build costs rising and land values in inner London remaining competitive, there has been a shift  in development towards outer zones. Between 2014-2017 66% of starts were in Zones 1 &2, compared with just 40% between 2018-2021.               

These towers in well-connected locations are a crucial part of Outer London’s contribution towards meetings it’s housing need.

Limited supply is driving a return to off-plan sales in the new build mainstream market

The mainstream market has seen a return in the proportion of units that are sold whilst under construction, following an increase in every quarter for the past year. This is a symptom of London’s growing supply and demand imbalance, intensified by a low interest rate environment and a stamp duty holiday. With limited supply of second hand housing stock and the end of help to buy looming, more buyers appear to be returning to off-plan purchasing to secure the best plots. Despite a significant increase in quarterly sales, buyers in the prime market have not felt the same urgency to purchase off-plan. A combination of a large pool of completed stock and restrictions on international travel have reduced appetite for off-plan purchasing. Looking forward we expect this trend to return to pre-pandemic levels, given the welcomed return of overseas buyers and city dwellers to London’s prime markets.