Despite an increase in development in London the new homes are concentrated in a handful of areas and some are so pricey that interest from buyers is waning, according to London Central Portfolio.
The result is a deepening new build crisis in inner London in particular and the lack of interest in new builds is seeing prices fall.
The report from London Central Portfolio shows that overall the number of new developments approved for construction has surged this year, with a substantial 20% increase in the planning pipeline since 2013, representing 106,208 new units.
However, this pipeline is largely made up of projects in cluster areas around Tower Hamlets and south of the river in the Battersea-Nine Elms area where there is already a proliferation of new developments. This year, a further 33,239 and 18,665 units respectively are now scheduled to be built.
New applications have also rocketed. Applications for 17,494 new units including 111 towers, buildings over 20 storeys, have been submitted, a 27% increase on 2013. This is equivalent to one new tower application every three days, of which 90% are located in Tower Hamlets and Wandsworth’s Battersea-Nine Elms development.
Despite the ever increasing number of new developments, however, statistics have shown that the attraction of these new properties, where prices now average £914,532, is waning.
According to LCP’s analysis of the Government’s Land Registry data, only 1,491 new units have been sold so far this year, a substantial 43% decrease on this time in 2015. This compares with older properties in inner London where transactions have remained static, 13,194 in 2016 compared with 13,190 over the same period last year.
The analysis also shows that square foot prices have also fallen for new properties. Across the Battersea-Nine Elms stretch, for example, prices are down 8% on their 2014 high. This is in stark contrast to London as a whole where prices are up 23%.
New build sales volumes are also significantly down, decreasing 43% on the same period last year but the prime central London market remains largely protected, due to its limited new build potential. Sales activity has been normal in the first half of this year
Naomi Heaton, chief executive of LCP, said: “In light of the plethora of tax hits over the last few years, possibly exacerbated by the uncertainty of Brexit, it appears foreign investors, the majority buyer of new developments, may finally be turning away.
“These properties typically sell at a significant premium, averaging 25%, over older stock. History demonstrates that a saturation of overpriced commodity style property leads to softening prices, particularly during times of economic uncertainty.
“In Tower Hamlets, for example, which undertook an extensive building programme before the Global Financial Crisis (GFC), prices took six years to reach parity with their pre-recession level. In contrast in prime central London, where there is very limited new build due to the conservation of its architectural heritage, prices had bounced back by 2010. In a similar fashion, we are again seeing today business as usual for older stock.”
According to LCP’s research, just 271 new build sales have been recorded in prime central London in the first six months of this year. This limited new build potential protects the sector from the ever growing crisis, which is having a notable drag effect on headline average prices for London. Sales activity has been normal in prime central London this year, with 2,606 properties sold to date, on track with the long term average of 5,213 a year since the GFC.
“Whilst no concrete evidence of post-Brexit market dynamics has yet been published, we expect prime central London real estate to respond in a broadly similar way as it did during the Global Financial Crisis when the market out-performed almost all other asset classes. A flight to quality and the security of blue-chip tangible assets will be underpinned by the continuing weakness of Sterling,” added Heaton.
“Alongside this, the attractions of prime central London as a centre of culture, excellence and education with absolute rule of law and unequivocal title to property remain undimmed. We firmly believe that these robust market fundamentals will support continued asset appreciation particularly in the mainstream private rented sector. LCP has already seen a fivefold increase in investment enquiries since the vote.”
For the rest of inner London, however, falling sales volumes in new developments and the exponentially increasing number of such schemes is causing major concern, the firm suggests, describing an increasingly worrying picture for areas with a high concentration of new builds, highlighting the ever growing imbalance of supply and demand and a very real concern that falling new build prices will have a knock on effect on the general housing market.
“With 51,904 new units slated for Tower Hamlets and Wandsworth alone, this will take a heavy toll on these areas where there is already extensive oversupply and the buying pool is shrinking thanks to ever more tax hikes,” Heaton added.
“In the cluster areas, this could have a detrimental knock-on effect for existing home owners, adversely impacting the value of their own homes as well as the economy as a whole, if the Exchequer’s tax take in all likelihood diminishes.”