Viability, Supply, Demand and Sentiment in the London Residential Market 2023

By Chris Pidwell, Project Director Cost Management

The recent, annual London Resi conference heralded some stark statistics on the challenges faced by the London housing market over the next few years.  Delegates were keenly discussing viability, supply, demand and particularly market sentiment as the London housing market adjusts to turbulent times.

Viability: The viability of the London housing market has been greatly impacted by changes in tax and stamp duty policies. These include a 2% stamp duty land tax (SDLT) surcharge for international buyers effective from 1st April 2021, a 3% levy on second homes, banded SDLT with 10% on properties over £1m and 12% on those over £1.5m, the end of tax relief on buy-to-let mortgage interest in April 2020, and the end of the government help to buy scheme on 31st March 2023.

In addition, the recent increases in construction costs and planned regulations have made viability very different. Giving an example, a large private developer cited an appraisal for a 76 unit development in London in 2021, which projected a profit on cost of 20%. However, if the same development was built in 2023, it would make a 4% loss on costs. The swing in viability is due to a number of factors, including the loss of both affordable and private units due to the requirement for a second staircase, reduced revenue due to lower net internal area and no increase in sales price per square foot. Commercial revenues are dropping due to yields softening from 6.5% to 8.0%, an increase in build costs of approximately 18%, increased planning costs and professional fees, as well as the weighty increase in finance costs due to the near doubling of interest rates.

Furthermore, the rising percentages of affordable housing requirements, an increased requirement for dual aspect units, a reduction of embodied or whole life operational carbon, further overheating mitigation measures, and rising Community Infrastructure Levy (CIL) and Section 106 (S106) contributions, create a perfect storm of cost pressures which make viability even more challenging.

Supply and demand: Partly as a result of the viability and cost issues, the supply of new housing in London has fallen. Construction starts are 46% down on their peak of approximately 34,000 in 2015, and construction completions have fallen 18% since their peak in 2016. This trend is on track for the lowest level of housing supply in 80 years. Should we hit the currently unobtainable target of 340,000 homes/year, 145,000 of these should be affordable tenure. Currently, the annual average delivery is 48,000. It is estimated to take 50 years to fill the current backlog.

Sentiment: Market confidence is being undermined by a “perceived,” some would say tangible, lack of government guidance. There have been five Ministers of State for Housing and Planning since February 2022, and we are now on the 15th since May 2010. Someone joked that if you could name the current Housing Minister, then you probably ARE the current Housing Minister!

Ongoing planning reform remains sketchy, with the Levelling-up and Regeneration Bill (LURB) and the National Planning Policy Framework (NPPF) having a number of sections yet to be seen in outline draft let alone detail. These will have serious consequences for developers and investors, yet very little is known about them. They will possibly include new National Development Policies (NDMPs) that are likely to trump any local plan conflicts; urban uplift that will apply, but housing density should not “be significantly” different than surrounding areas; green belt does not have to be reviewed; measures to make developers build out; an Environmental Outcome report that replaces the Environment Impact Assessment; an infrastructure levy and planning fee increase of 35%; the removal of the “free go” for repeat application; and higher fees for fast tracking.

There was certainly consensus across the floor that change is needed, particularly on the political front with:

• An increase in grant levels to achieve the 35% affordable homes target
• Review of current and proposed building regulation alongside the Mayor’s Design Guide to achieve a balance between design and cost efficiency
• CIL and S106 reform
• Joint Ventures or government appointment scheme enablers
• General review of taxation to stimulate new development

Sales Overview: The Build To Rent (BTR) sector continues to maintain its position as the largest sector in the London new build market, with a share of approximately 40%. Overseas purchases account for around 30%, while the domestic market accounts for only 3%. These figures highlight the continued importance of overseas investors in London’s new build market.

In closing: It remains to be seen how the London new build market will adapt to the immediate market challenges, but London Resi remains a key event for the industry to collaborate and seek solutions. Complacency about the importance of the sector cannot be allowed to set in, as we see other countries around the world, including our close neighbours in Ireland, increasingly looking like more attractive propositions for developers and investors.

Tough times ahead.  This emphasises that the role of Cost Manager is ever more important as an absolutely integral part, if not leader, of the feasibility process for any scheme. Advising on all cost matters, including design efficiency, current material prices, carbon calculations and procurement options we can make a real difference to the viability of the scheme.