Unlocking new supply

International developers are entering the London market and unlocking new supply.

2 July 2014, words by Paul Tostevin

 

There has been a recent uptick in housing starts in London. This has been largely driven by domestic players who constitute the largest part of the mainstream market.

Economic recovery and increasing household incomes have played a big part in household demand, but also in encouraging property and development companies to actively promote land and build homes too. International developers and investors have also been an important part of the story.

Foreign developers and investors have accounted for a small number of land transactions since 2012 but, where they are active, their intentions are large. 
When calculated by number of potential units on these land holdings, international developers and investors in London land account for around a quarter of the long term development pipeline.

These include high-profile deals such as Malaysia’s SP Setia at Battersea Power Station, China’s ABP at Royal Albert Docks, and Hong Kong’s Knight Dragon at Greenwich Peninsula.

Globally-active foreign players bring with them the financial backing to get these vast and challenging sites off the ground, unlocking much-needed new housing supply. These developers are accustomed to delivering development at huge scale in their home markets, and bring with them significant expertise in large scale delivery.

Meanwhile, finance from foreign banks and institutions is funding many of London’s new schemes – even if they are being undertaken by UK developers. Foreign lenders, most notably German banks, underpinned the market during the downturn. UK-based banks are now showing renewed appetite to lend and the number of new lenders has grown rapidly.

In London development finance, 63% of financiers fall into the ‘other lenders’ category.

Such is the strength of performance in the UK real estate sector (commercial property included) that there is a significant imbalance between opportunities for lending, which currently stand at £40 billion, compared to lender ambitions of £75 billion, according to Savills figures. This will encourage funders into secondary, non-core locations and possibly into more specialist and non-core types of property.

In the London residential sector, this means outer London locations, supported by domestic end-users. This should mean more supply where it is most needed, in the lower and mid mainstream markets. It should also start to lessen the perception that only prime central, international London is being built.

If housebuilding can be increased, this would do much to lessen the fear of overseas involvement. If home building is to be increased, overseas funders, developers, land owners and promoters – and even landlords and end-owners will be instrumental in enabling it to do so. We should expect nothing less in a global city.

Graph 5.1

Londoners first: the Mayoral Concordat

In May 2014, Boris Johnson launched a Mayoral Concordat, a voluntary commitment by developers to market new homes in London to Londoners. 
50 developers (accounting for the majority active in London) signed up at launch, committing them to selling new homes on every development to Londoners before, or at the same time as they are available to overseas buyers.

Developer business plans are based on an early return on capital employed. Many foreign buyers are willing to buy ‘off plan’ in a way that UK-based buyers generally haven’t been in the past. This means they put down deposits to buy a unit sometimes before construction has even commenced.

This type of purchase has been critical in helping to forward fund the early stages of development throughout the market downturn as 
it either provides finance and/or gives confidence to lenders that a scheme has sold and will sell in the marketplace.

Selling abroad has therefore unlocked developments not only for the private sector but also for the much-needed affordable and intermediate housing on most London schemes. As most ‘off-plan’ buyers will seek to let their properties, overseas off-plan sales have also provided market-rented housing supply.

Today, London’s domestic market 
has recovered to a sufficient degree 
that developers are confident in launching to the home market. Such is the demand for new homes in the capital, an increasing number of local buyers (both domestic and foreign) are increasingly willing to purchase off plan – again providing capital and security for forward-funding.

Foreign buyers bankrolled the industry during the credit crunch. Today, mortgage financed London-based buyers will drive the new build market. The greatest opportunity is in the lower mainstream markets (priced under £450psft), where Savills estimates a shortage of almost 6,500 homes a year. At the same time, the prime markets (priced in excess of £1,000psft) now look more fully supplied.

As developers look beyond the prime markets of central London, London-based buyers will only grow in importance. The Mayoral Concordat ensures that London-based buyers have every possible opportunity to buy the new homes being built.

 
 

Key Contacts

Yolande Barnes

Yolande Barnes

Director
World Research

Savills Margaret Street

+44 (0) 20 7409 8899

 

Paul Tostevin

Paul Tostevin

Associate Director
World Research

Savills Margaret Street

+44 (0) 20 7016 3883

 

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