Global Real Estate

Housing supply pressures in prime central London

The UK's annual rate of inflation remained at 2% during the twelve months to June, the ONS reported this morning. Economists had been expecting a dip to 1.9%.

Services inflation, which is among the key figures that will dictate whether the Bank of England opts to cut the base rate next month, remained unchanged at 5.7%. Economists had been expecting a fall to 5.6%.

This is far from a bad print, but an August rate cut surely looks less likely today than it did yesterday.

The King's Speech

Prime minister Keir Starmer will deliver his first King's Speech this morning, so we should get more details on how the government intends to unlock 1.5 million homes during its first term.

The papers already have snippets, and we'll take a closer look at the contents of the speech in Friday's note. The Times leads on Starmer's plan to introduce "new legal measures will force councils to quickly identify enough land to meet their predicted future housing needs." Once that land has been identified, the presumption in favor of development will apply. Local residents will be able to weigh in on design, but can't block plans, the paper says. Elected mayors may get powers to identify land for housing.

The government will also revisit land value capture. The FT had a good piece yesterday on what that might look like. In 2018, Sir Oliver Letwin conducted a review into how to speed up build out rates of consented homes. Among his suggestions was a call to enable councils to insist on levels of social housing that would in effect cap the value of land earmarked for large developments “at around 10 times their existing use value”. Labour "is now exploring how to implement a version of the Letwin proposals,” the paper says, citing Whitehall officials.  

Prime London development

The challenges of housing development differ by location. Last week, Anna Ward published an exhaustive overview of conditions in prime central London, where land shortages and tougher planning rules are weighing on supply.

The pipeline has contracted by 70% over the past decade, Knight Frank data shows. Looking at homes with a blended value of £3,000 per square foot and above – with prices ranging from £1 million to north of £30 million – the pipeline of homes with planning, under construction or recently completed, has shrunk from some 3,350 units ten years ago down to 1,114 currently. The number of available homes for sale has fallen by 10% in the past nine months alone.

New supply would need to pick up exponentially to reverse this trend. But developers are grappling with high build and finance costs and a tight land market which has led to a significant drop in new starts across the capital, but particularly in inner London. Of the schemes underway or complete and with homes available, the majority are in Belgravia (seven schemes), followed by Mayfair (five). See the report for more.

Co-living

The UK's co-living sector is entering a new phase as increasing numbers of institutional investors target the sector.

The macro tailwinds are undeniable. They include a clear and deepening supply/demand imbalance in towns and cities across the country – which are failing to meet housing needs – increasing population, urbanization, decreasing household sizes and shifting consumer attitudes, particularly post-pandemic. Affordability constraints for potential first-time buyers have also increased the demand for good quality rental housing and supported significant rental growth.

Last year, nearly 2,500 new co-living beds completed and opened to residents, reflecting a 65% increase on co-living delivery in 2022, according to a new Knight Frank report. It takes the total number of operational co-living homes in the UK to 7,540. A further 13,483 co-living units are currently under construction or have planning permission granted.

A further acceleration in the growth of the sector is anticipated, should investors realize their ambitions. According to our 2023 UK Living Sector Survey, which captured the views of leading institutional investors who currently own more than £75 billion in Living sector assets across the UK, 45% plan to have invested in co-living by 2028, up from 32% of respondents who had already invested.