London property development: Knight Frank forecasts robust demand in the Capital, but urges caution on pricing expectations

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An in-depth report on the London development sector, released today by Knight Frank, urges caution on the market’s continued upward pricing trajectory.

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The shortfall in planned housing is around 35% over the next ten years.

An in-depth report on the London property development sector, released today by Knight Frank, urges caution on the market’s continued upward pricing trajectory, and suggests some developers may need to recalibrate their expectations when it comes to the top-bracket sales.

Knight Frank has drawn together the latest official data and its own market intelligence to give estimates for supply of housing, both private and affordable units, over the next ten years, as well as estimates of demand for housing, based on the latest census data.

The estimates show that the current shortfall between household growth and supply of housing will continue in both the central and wider London markets.

Funding constraints are expected to put an effective ‘lid’ on development in the coming years, although in the wider London market, a rise in the volume of schemes being proposed will result in a slight increase in development volumes.

But demand for new homes, as a result of the continued rise in the number of new households being created, will far outstrip supply.

The report finds that in the wider London market, an average of around 24,000 units per year could be built over the next ten years, but there will be additional demand for an extra 37,000 homes per year.

The shortfall in central London is even more pronounced, especially when the demand for second homes is taken into account.

Grainne Gilmore, head of residential research at Knight Frank, says: “Our figures suggest that overall undersupply will continue to be a feature of the Greater London market – the shortfall in planned housing is around 35% over the next ten years. In central London, which incorporates many of the prime central London postcodes, the shortfall rises to 55%.”

This shortfall in central London will create a particular opportunity for schemes on the edge of central London.

Gilmore explains: “Looking at the central London development pipeline, a pattern emerges: some of the largest schemes planned for the coming decades are poised on the edge of prime central London. If the units are produced to the right specification and priced at the correct level, there could well be a ripple out of interest to these more peripheral locations from the traditional central-London purchaser.”

Yet Knight Frank warns that the continued undersupply in the market may not guard against possible challenges for schemes which are not priced sensibly, especially those targeting the top end of the market.

Liam Bailey, head of residential research at Knight Frank, says: “The strength of sales over the past few years has made developers concentrate on the prime and super-prime segments of the market. With values surging across the Capital, it has been tempting for developers to put upward pressure on prices. The problem comes when this strategy is applied to sites with secondary characteristics – this leads to unrealistic pricing, and to unsuitable buildings being brought forward for development. Developers should temper their expectations according to the nature and location of each site. The biggest shift may need to be to the current mind-set that they need to build, in every part of London, bigger units to maximise £ per sq ft values.”

ENDS

For further information, please contact:

John Williams, Knight Frank Head of PR, t: +44 (0)20 7861 1738
Rosie Cade, Knight Frank Residential Development PR Manager, t: +44 (0) 7500 033488

Notes to Editors
Knight Frank LLP is the leading independent global property consultancy. Headquartered in London, Knight Frank and its New York-based global partner, Newmark Knight Frank, operate from 242 offices, in 43 countries, across six continents. More than 7,067 professionals handle in excess of US$817 billion (£498 billion) worth of commercial, agricultural and residential real estate annually, advising clients ranging from individual owners and buyers to major developers, investors and corporate tenants. For further information about the Company, please visit http://www.knightfrank.com.

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Knight Frank London Property Development Report 2012