new alarm bells for london`s housing supply

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new alarm bells for london`s housing supply
CENTRAL LONDON DEVELOPMENT
NEW ALARM BELLS FOR
LONDON’S HOUSING SUPPLY
There may be further trouble ahead for London’s housing supply problem. The number
of new build starts and the number of new planning applications have dropped like
stones during 2016. An already cooling sales market, stamp duty changes and Brexit
can all claim part-responsibility. But apportioning blame will not solve, avert or reverse
the inevitable slide in construction activity. The sales market is exhibiting signs of
improvement, but progress is likely to be steady with developers exercising caution. The
new Prime Minister and the new Mayor of London need to step in, and step in fast.
UK Research, September 2016
#NewResidentialThinking
SALES MARKET
DEVELOPMENT MARKET
SALES PRICES
UNITS STARTED
+0.9%
-0.3%
6 MONTHS
TO Q4 2015
6 MONTHS
TO Q2 2016
8,750
3,670
+0.7%
UNITS
UNITS
-58%
12 MONTHS
TO Q2 2016
6 MONTHS
TO Q4 2015
6 MONTHS
TO Q2 2016
6 MONTHS
TO Q2 2016
SALES TRANSACTIONS
5,270
4,650
UNITS
UNITS
UNITS APPLIED FOR
9,870
8,240
UNITS
UNITS
-17%
-12%
6 MONTHS
TO Q4 2015
Source: JLL, Molior
6 MONTHS
TO Q2 2016
6 MONTHS
TO Q2 2016
6 MONTHS
TO Q4 2015
6 MONTHS
TO Q2 2016
6 MONTHS
TO Q2 2016
CENTRAL LONDON DEVELOPMENT
2
DEVELOPMENT MARKET
STARTS AND APPLICATIONS
DROP SHARPLY
The number of new unit starts has fallen sharply during 2016 as has the
number of units entering the planning system. It seems that developers have
taken evasive action in response to the raft of issues impacting the market. The
construction activity slowdown is disappointing given the escalation towards
meaningful development volumes over the past couple of years, but the big
questions are when will developers feel more comfortable about ratcheting up
again and will there be any additional political support to do so.
Trouble ahead
The number of units to begin
construction in Central London during
the first two quarters of 2016 has
slowed notably. It is true that Q4 2015
witnessed an exceptionally high number
of starts but the decline during 2016 has
nevertheless been acute.
There are probably five key factors
behind the slowdown in starts. The first
is that the sales market was already
beginning to ease during the latter half
of 2015 while the second factor is that
the escalation in construction activity
following the global credit crisis had to
slow at some point as construction levels
were already breaking through record
levels.
The market was then stunned by the
3% additional home stamp duty tax
announced in November 2015 which
came on the back of the stamp duty
reform in 2014. The market in Q2
2016 was then distracted by the EU
referendum.
This combination is having a damaging
impact for housing supply right across
London and in Central London.
And unfortunately it comes just at the
time when construction volumes were
reaching levels which might at least
begin to arrest London’s escalating
supply crisis. But now, incredibly quickly,
the brakes have been firmly applied and
the tyres have come to a screeching halt.
Startling slowdown
The scale of the slowdown is staggering
(see chart opposite). During Q4 2015
there were 5,260 unit starts across
Central London but in Q1 and Q2 this
year there have been 1,840 and 1,830
respectively – a startling 65% slowdown!
65%
Decline in unit starts
Q4 2015 to Q2 2016
Perhaps more worrying than this overall
Central London easing is that Outer
Core areas have witnessed the sharpest
and most prolonged slowdown. Further
afield, and although not covered by this
research, the number of starts in the
wider Greater London area has also
been slowing since Q3 2015.
These trends are hugely concerning
as the housing prospects for ordinary
people in London grows evermore bleak.
Tony Pidgley, Chairman of the Berkeley
Group, quite rightly raised concerns at
the firm’s most recent trading update
about the detrimental impact that
some Government policy would have
on London’s housing supply issues. Our
figures certainly support this view and
we echo his sentiments.
As a result of the slowdown in starts, the
number of units under construction has
now also passed its peak.
There were 34,300 units underway in Q1
2016 but this dropped to 33,920 units in
Q2, the first quarterly fall for four years.
Applications fall
And it isn’t just the current pipeline
which is under threat. The number of
planning applications has also declined.
The number of units sent for planning in
Q2 2016 was 48% lower compared with
Q1 and was also 54% below the quarterly
average from the previous three years.
The slowdown is most notable in Core
areas of Central London where just 680
units were applied for planning in Q2
2016, significantly shy of the 3,710 in
Q3 2015.
However, even in Outer Core locations
the appetite of developers looks to be
softening as 2,150 units were sent for
planning in Q2 this year compared with
over 5,000 in Q1.
Damning prognosis
The outlook for housing supply has
certainly taken a dive over the past 6-9
months and although recent news on the
economic impact of Brexit has softened
recently, we do not expect this to be a
catalyst to significantly turn around
the deteriorating prognosis for housing
supply in London.
NEW PLANNING APPLICATIONS WAY DOWN
Number of unit starts per quarter (000s)
Number of units applied for planning permission per quarter (000s)
10
6
5
8
CENTRAL LONDON DEVELOPMENT
NEW BUILD STARTS DROP SHARPLY
4
6
3
3
4
2
2
1
0
0
Dec 14
Mar 15
Core
Jun 15
Sep 15
Dec 15
Mar 16
Jun 16
Outer Core
Dec 14
Mar 15
Core
Jun 15
Sep 15
Dec 15
Mar 16
Jun 16
Outer Core
Source: JLL, Molior
Source: JLL, Molior
CONSTRUCTION ACTIVITY PASSES PEAK
CORE SUBMARKETS LEAD NEW STARTS
Number of units under construction (000s)
Number of units started in year to Q2 2016
HIGHEST
35
North
2,730
Central
North
HIGHEST
1,090
30
North
Central
West End
North
940
1,760
640
25
West
1,180
20
1,290
8,270
2,600
West
End
2,220
540
Canary Wharf
3,040
East
1,740
City
1,630
Central
SouthCentral River
Outer River
West
4,260
1,030
15
Central
West
4,490
200
310
Canary Wharf
1,860
South East
5,180
South West
1,860
10
Outer River
1,040
Central
South
1,810
South East
1,610
5
South West
330
0
Dec 14
Mar 15
Core
Source: JLL, Molior
Jun 15
Sep 15
Dec 15
Mar 16
Jun 16
Outer Core
Source: JLL, Molior
LOWEST
City
Central River
Central
West
East
LOWEST
CENTRAL LONDON DEVELOPMENT
4
SALES MARKET
SIGNS OF IMPROVEMENT
The Central London development sales market is showing signs of
improvement during Q3. However, demand and sentiment are notably down
compared with a year ago. Conditions are patchy and inconsistent with some
schemes selling well while others struggle. This is reflected in pricing and
pricing policy too. The divergence between better performing more affordable
Outer Core submarkets and more expensive Core locations remains.
Sales market looking up
The new build sales market has begun
to brighten during the latter part of Q3.
The market, as well as slowing slightly
following the post-crisis revival, has
had to endure a number of other
knocks, predominantly from stamp duty
changes, but more recently from the
Brexit vote.
Unfortunately the Brexit vote coincided
with the usual summer slowdown
making it difficult to gauge the true
impact of the vote. However, since lateAugust we have noticed a good deal
more interest when launches have been
made with enquiry levels also up on
existing live developments. This bodes
well for the remainder of 2016 although
demand levels are still down compared
with a year ago when investors were
more active.
The market is undoubtedly quieter and
more subdued. The number of sales
across Central London during H1 2016
was 4,650 units, down 12% on the 5,270
sales in H2 2015 while the number of
sales in Q2 2016 alone was also well
below the average of 2,490 per quarter
from the preceding five years.
24%
Fewer sales in Q2 2016 compared with
average from preceding five years
Owner-occupiers have become far more
important during the course of 2016.
Investors continue to make enquiries but
have been less active due to the new 3%
stamp duty surcharge, the loss of tax
relief and the uncertainty from Brexit.
Core sales rise
Surprisingly, it has been the number
of launches and sales in Outer Core
markets rather than Core locations
where the greatest change has
occurred.
The number of sales in Outer Core
areas has been on a steady decline
since Q3 2014 when it peaked at 2,690
unit sales. There were just 880 sales in
Q2 2016, a 67% fall.
In Core markets the number of sales
has been reasonably steady over the
past year, see chart opposite, although
this is within the context of a rise in
scheme launches.
Pricing flexibility
Gauging the market during the course
of 2016 has been difficult, as it often
can be when the market softens. There
has been a good deal of negotiation and
a fair degree of flexibility. But applying
a broad brush assessment across
London or even within local markets is
tricky.
Some schemes have struggled to
attract meaningful interest, while
others have still sold well. Some
developers have adopted a flexible
approach to pricing which has
frequently paid dividends in terms of
demand and sales rates. However, this
uneven and unpredictable marketplace
is making the analysis of pricing
difficult.
Overall, however, new build prices
across Central London have fallen
slightly during Q2 2016 but remain up
on a year ago.
0.7%
Average prise rise in Central London
in year to Q2 2016
CENTRAL LONDON DEVELOPMENT
NEW BUILD SALES EASE DOWN
Number of unit sales per quarter (000s)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
5
0.0
Dec 14
Mar 15
Core
Jun 15
Sep 15
Dec 15
Mar 16
Jun 16
Outer Core
Source: JLL, Molior
MODEST SOFTENING IN PRICES OVERALL
Outer Core and better value markets have
seen prices rise by 2.8% in the year to Q2
2016 while in Core markets the average
price fall has been 1.4%.
Q3 and Q4 looking brighter
The Central London sales market
is already showing some signs of
improvement during Q3 and it is
encouraging that the early Brexit
economic fears are looking more benign
than many initially feared. However, this
needs to be placed in context.
6
15
4
10
2
5
0
0
-2
% change per year
Within this average figure there is quite
a bit of difference between higher value
markets and more affordable locations
with even greater variation between
schemes (see map opposite).
% change per quarter
% change per quarter, per year
-5
Dec 13
Mar 14
Jun 14
Sep 14
Quarterly (LHS)
Dec 14
Mar 15
Jun 15
Sep 15
Dec 15
Mar 16
Jun 16
Annual (RHS)
Source: JLL
OUTER CORE SUBMARKETS SEE PRICE RISES
Price growth in year to Q2 2016
HIGHEST
North
%
1.2
Central
North
%
-1.6
It is probably good news that we are no
longer in a high turnover, high price
growth environment, but given some of
the new headwinds it is also unlikely that
we will return to the competitive demand
conditions from the past few years any
time soon.
Developers will need to adapt yet further
in order to thrive in such conditions but,
through no fault of their own, they do seem
to be becoming amongst the most flexible
business sector in the country.
East
5.8%
West End
%
-4.5
City
LOWEST
0.8%
West
%
1.1
Central
West
%
Central River
%
0.0
-5.8
Central
South
%
Outer River
%
2.2
1.0
Canary Wharf
%
1.9
0.7%
South East
%
ALL CENTRAL
LONDON
5.3
South West
%
1.2
-1.4%
CORE
2.4%
Source: JLL
OUTER CORE
THE FINAL WORD
The total number of housing completions in Greater London has averaged just 17,500 units pa
over the past 25 years (all tenures, source GLA) and only twice has the aggregate peaked above
24,000 units. Once was in 2004 and the other was 2015. Last year’s total is still well below
estimated need, but the trend in both starts and completions was encouragingly upward.
It is true to say that the number of starts was beginning to ease slightly towards the end of 2015,
but the new additional home stamp duty charge and the Brexit decision look set to reverse all
the good work of the past few years. The 2014 stamp duty reform has also impacted higher
priced property and locations.
In Central London, JLL estimate that the number of unit starts during Q2 2016 was 65% lower
than Q4 2015. This should make shocking reading for London Mayor Sadiq Khan and indeed for
Prime Minister Theresa May. Given the uncertainty following the EU referendum, and despite
recent indications that the initial economic impact from Brexit might be more benign than many
assumed, developers and housebuilders are unlikely to be heading to new building sites with
huge enthusiasm and gusto in the immediate future.
This means that starts will be subdued for the remainder of 2016 and probably well into 2017 and
it will be quite some time before the trend returns to an upward trajectory or that completions
head towards 24,000 units again.
There are a number of development supports such as Starter Homes and the sale of public
land but making private investor ownership less attractive, despite its virtuous intentions, will
undoubtedly lead to fewer homes being delivered, which must be a concern for Londoners and
politicians.
The outlook, however, is likely to be helped to some extent by the improving sales market, where
we have seen a pick-up in demand and interest during Q3, and also as it appears that prices are
stabilising post-referendum.
Neil Chegwidden
JLL Residential Research
KEY CONTACTS
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This is our #NewResidentialThinking
Join the discussion on twitter @NeilChegwidden / @Adam_Challis / @JLLUKResi
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