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The London skyline is as constant as it is transformative. It seems entire boroughs are being transformed in the blink of an eye. With unit completions hitting an all-time high of 24,000 in the last year, it’s understandable that one of the most common questions asked by GCC buyers is whether London is now facing an oversupply. Let’s start with the long answer.
At the beginning of this year, London surpassed its pre-Second World War population peak of 8.615 million. The population increased by one million over the last decade, yet only 200,000 new homes were delivered. Taking into account the demand backlog and the forecast for a further population increase of one million over the next ten years, CBRE estimates London needs 52,000 new homes each year to fully satisfy demand. If every one of the residential units in the planning pipeline are to be approved and developed, there is still only provision for 300,000 new homes over the next decade.
The supply shortfall is by no means a problem unique to London, however, it is the most afflicted city in the developed world. The ratio of housebuilding to population increase in London is 0.2 which compares to 0.53 in New York and 0.7 in Beijing.
In short, London is nowhere close to a property oversupply, which explains why average prices are up by 10.6 per cent year-on-year and up from 7.3 per cent in the second quarter. A lack of supply is not the only explanation for a 19 per cent year-on-year decline in transaction volumes.
Knowing every street of the Golden Postcodes, UAE buyers can practically list the super-prime properties that have been on the market for three months or more. Property data provider Lon-res notes transaction in the £5million-above bracket increased by 23 per cent compared with the same time last year, although this accompanied a price correction of around 11.5 per cent. In the £1million-£2million bracket, a nominal price increase is followed by a 22.5 per cent decline in transaction volumes. This illustrates the standoff between sellers keen to benefit from upward price trends, and buyers determined to offset the recently increased cost of acquisition.
There is no such stickiness in the new build arena; of the 2,830 units completed across Central London in the past 12months, only 120 or 4 per cent remain available for sale and 61 per cent of the units under construction have sold off-plan.
The latest round of Stamp Duty Land Tax reforms, combined with the recently introduced Annual Tax on Enveloped Dwellings and non-dom inheritance tax, has forced buyers to rethink their investment strategies. Taken alone, the UK still offers a relatively attractive tax environment for international property investors, although there has been a drop in the number of new applicants from Russia and China. CBRE, however, has seen an upsurge in the number of British and Middle Eastern applicants.
London continues to be the destination of choice for Middle East investors due to its infrastructure, stable political and legal framework and quality of life. The city has always attracted institutional commitments from the region, but we are now increasingly seeing many individual buyers treating the city as a second home.
With a greater emphasis on value for money, Middle East buyers recognise the merits of investing outside of the traditional prime central locations. Price points in Zone 2 locations are around half the Zone 1 average (£723,000 versus just over £1.5million). Fulham Riverside continues to appeal to GCC and Saudi buyers, averaging only £1,200 per square foot. Underpinned by strong domestic demand (70 per cent), it promises stronger capital growth than the super-prime market.
In the southern boroughs, house prices grew by around 20 per cent last year. In the East, Newham was the standout performer with a 23 per cent increase. Although Newham offers a supply pipeline at 262 per cent of demand, its off-plan sales rate is higher than anywhere else in London at 89 per cent. We’re seeing is the absorption of demand drawn away from boroughs with an under supply. There are 26 out of 33 boroughs that face such a shortfall.
The super-prime market certainly faces a challenge as agents struggle to address vendors’ unrealistic price expectations. Away from the dazzling Harrods lights, however, properties simply cannot be built fast enough.
Al Nisr Publishing accepts no liability for the views or opinions expressed in this column, or for the consequences of any actions taken on the basis of the information provided.
Source: Safina Ahmad, Special to Property Weekly
The author is Head of Residential Agency at CBRE Middle East.