An increase in the sales rate and planning applications over the past year means that an average of just under 35,000 new homes a year are set to be built over the next five years, up from an estimated 28,000 units a year ago.
This is good news, but in according to a new report from international real estate adviser Savills the shape of the development pipeline does not match the shape of demand. A shortfall of 15,000 homes a year will remain, increasingly concentrated in the lower tiers of the market, beyond zones 1 and 2.
In a city where 70% of households earn less than £50,000, affordability is increasingly constrained. Savills anticipates that the biggest gap between emerging supply and demand will fall in the lower mainstream markets where a total shortfall of 28,500 for homes priced under £450 per square foot is anticipated. This is the equivalent of between £300,000 to £350,000 for a two bedroom flat beyond zone 2.
Within this price bracket, Savills anticipate a shortfall of 6,500 homes for market sale and rent, the bulk of which (5,500) will fall under £375 per square foot. This is in addition to a shortfall of 7,500 units per year projected in the affordable sector, where 15,500 new homes a year are needed, including all forms of intermediate and shared ownership tenures.
The report highlights a further shortfall of 7,500 units per year is projected in the affordable sector, where 15,500 new homes a year are needed, including all forms of intermediate and shared ownership tenures.
In contrast, the prime markets, that is property costing £1,000 per square foot and upwards, are now fully supplied, as a result of a shift towards higher value markets among developers seeking to secure sales to wealthier cash rich buyers and investors with the potential to forward fund schemes.
The report points out that London’s population is booming, having risen to 8.4 million last year from 6.7 million in 1986, and is projected to reach nine million by 2020. A growing shortage of housing stock has accelerated house price growth in the capital, where values are now more than twice the UK average.
Price growth is now rippling out and the sharpest growth is being seen beyond the city centre. Over the last 12 months, Waltham Forest has topped the chart with a rise of 23.5%, followed by Lambeth at 21.9%, Southwark 21.1%, Islington 20.6% and Hackney 19%, all outperforming the London average of 12.4% and sought after Kensington and Chelsea at 12.8%.
‘The unassailable demand for more homes in the mainstream markets makes the case for building and investing away from the centre compelling. Now is the time for developers and institutional investors to look beyond the prime markets of central London,’ said Susan Emmett, Savills UK residential research director.
According to Paul McGowan, director, Savills Greater London development and sales, emerging neighbourhoods and areas of regeneration, particularly where there are significant transport improvements, carry the potential to create sustainable communities, lifting values and driving occupier demand to new levels.
Savills estimates that of the 50,000 homes needed each year for the next five year, 21,000 privately rented homes and 15,500 for a variety of subsidised affordable housing.
The private rented sector now houses a quarter of all London households. This is slightly more than the 24% living in social housing which declined by 1% between 2001 and 2011. Numbers in the private rented sector are expected to swell to 34% by 2021, Savills forecasts.
‘Local authority and housing association involvement will be essential to delivering the right mix of properties and we expect to see institutional investors boosting their stake in the private rented sector at all levels,’ said Ingrid Reynolds, director, Savills housing development and regeneration.
‘The trend towards a broader definition of affordable housing to include various degrees of subsidised rent, as well as schemes to support affordable sales, is a reflection of the growing pressure to provide suitable housing to households on a wider range of incomes not just the most vulnerable,’ she added.
In terms of housing delivery, establishing which types of affordable housing qualifies for planning purposes is key when calculating viability of a scheme. The report suggests that the Greater London Authority may need to support currently non-qualifying affordable housing to reach its target of 15,000 homes or to encourage trade off between market rental and affordable housing in order to achieve viability.
