London sees slump in residential development

By Vivienne Shirley, Senior Consultant

Only five of London’s 33 boroughs met their targets for housing need during 2017-18, with twenty delivering less than half, according to Knight Frank’s latest London Residential Development Report.

Whilst Mayor Sadiq Khan set the capital the target of building 66,000 new homes annually, already lower than the government’s housing need figure of 72,407, just 31,723 additional dwellings were built – less than half the number required.

This represents a 13% drop on the year before, largely due to a slump in the number of offices converted to residential accommodation under permitted development rights (PDR). These fell by 52%, suggesting most suitable space has already been converted since the introduction of PDR in 2013. However, this figure could lift again once the government’s proposals on extending PDR for upwards extensions, confirmed in the Spring Statement, come into place.

Other factors suppressing housebuilding include weak sales activity. Patrick Gower, Residential Research Associate at Knight Frank, commented, “The market faces structural challenges that are suppressing long-term sales activity, including stretched affordability, tighter mortgage regulations introduced in the wake of the financial crisis, and patchy house price growth.”

Activity has been dampened further amid the uncertainty caused by Brexit, with sales in Q3 2018 down 12% on 2017 as buyers waited for greater clarity about Britain’s future EU relationship as the March departure date approached – that wait now looks set to continue for at least a few more weeks. While Knight Frank’s data indicates pent up demand for new homes, with the ratio of new prospective buyers to homes available at the highest level in four years, many developers are holding off on starting new schemes until sales activity picks up.

Brexit is also at least partly the culprit for the rising costs faced by developers, which have increased by 14% in the three years to January 2019. This includes labour and material costs, with the cost of imports driven up by the weak pound. Over a quarter of London’s construction workforce come from other EU countries, with one fifth saying they have considered leaving the country due to Brexit uncertainties in a recent survey.

Delivery may well fall yet further judging by the planning and construction pipeline. Applications for 20+ private units continued to drop by more than 10,000 since 2014 to 40,461, while the number of 20+ units that started construction in 2018 was 23,130 – a decline of 32% since 2015. With the number of homeless deaths in the capital continuing to rise, and all 32 London boroughs among the top 45 local authorities with the highest per capita spend on temporary accommodation, government may need to consider stepping in to build urgently needed social housing while private developers wait for the Brexit uncertainty to pass.