An annual analysis by leading built asset consultants EC Harris has identified 150 sites spanning traditional core prime central London sites such as Mayfair, Belgravia and Knightsbridge as well as emerging ‘edge of core prime’ areas in the wider central London market such as The South Bank, Bayswater and Paddington, Chelsea and Fulham and City and fringe.
It says that the largest element of increase in the last 12 month period has been in the lower end of the prime value range in the peripheral prime areas sitting between £1,250 per square foot and £1,650 per square foot sales values.
More than 4,600 additional units have entered the scope of the pipeline this year in this value band, a combination of new schemes together with existing schemes which have ‘leap frogged’ into the scope of this study due to significant sales value inflation.
The report adds that the quantum of overall pipeline for super prime schemes over £1,650 per square foot value appears fairly static in the year, reflecting a much more finite supply of sites in the traditional core prime areas.
The potential peak of development activity is predicted to be in 2017, but there are still significant question marks over the pace at which some land owners will progress forward due to problems with planning, funding, finding appropriate development expertise or implementing a desire to trade a site rather than develop it out.
The report points out that the plethora of planned development continues to stimulate discussion as to whether a bubble is being created and it highlights that many prime schemes, particularly at the lower end of prime values, are de-risking their exit through securing off plan sales long before commitment to start on site, particularly focused in the Far Eastern market.
If a scheme does not sell off plan sufficiently, it is unlikely to proceed to site or to enter its next phase, hence a much reduced risk of the new build apartment market over shooting any demand side market correction. This has created a self regulating supply and demand mechanism very unlike the circumstances which existed in the last boom when debt and equity funding was much more free flowing.
The real risk for developers is of an increasingly crowded market with traditional prime residential specialists now competing with volume house builders, commercial mixed use developers and, increasingly, foreign investors looking to carry out development directly.
The report says this is driving a need to get the product right to attract purchasers who now have a lot more choice and to ensure developments are adequately differentiated from the competition. This is putting pressure on development costs at the very time the construction market in London is showing signs of accelerating inflation and real strain in terms of delivery capacity. There are clear dangers for developers where increasing cost uplift pressures exist with a much more indeterminate medium to long term sales market.
‘It is no real surprise that our pipeline again shows significant growth in the year. What is perhaps more interesting is the shape of the market with a still greatly expanding supply at the lower end of the prime range but a fairly static supply in the core super prime areas of London where site opportunities are a lot scarcer,’ said Mark Farmer, head of residential at EC Harris.
‘The increasing challenge for investors and developers, is to avoid over paying for sites at a critical time when construction costs are increasing, the sales market is much more competitive and there is increasing scepticism about the real sustainability of rates of prime sales value growth seen in recent times,’ he explained.
‘What has been a window of opportunity for developers over the last few years with reducing build costs and increasing sales values is rapidly closing and becoming a much more challenging environment. Any softening of the market will be felt most by those developments which have aspirational values targets not underpinned by core location and quality fundamentals,’ he added.
The report highlights a number of specific market outlook issues for developers and investors including the strength of sterling relative to other currencies which is still creating inherent value for many purchasers in foreign markets, especially in Asia, where Sterling is still weak compared to their home currencies. Movement in currencies going forward will be crucial to levels of foreign investment in purchasing residential units and in direct development, the report adds.
Another is a potential Eurozone break up, although the firm believes this is looking increasingly unlikely although a flight away from the euro could still benefit London.
Another potential threat is the opening up of new foreign sales markets. Finding immature markets where wealth exists with suitable political, legal and economic frameworks could enable the pre-sales model to be replicated in other parts of the world.
