One of London’s popular locations for housebuilding saw a startlingly low number of private sale construction starts in the first quarter of 2019. In Zone 2 just outside central London, only 77 new homes got under way, according to research by Molior London. That’s 97% lower than the 2015 peak quarterly average and represents a drop in the ocean in plugging London’s acute housing shortage.
The slowdown is largely a result of measures introduced by the UK government between 2013 and 2017 to discourage buy-to-let investment purchases of new homes, in favour of first-time buyers. By reducing the competition in the market, the government has also inadvertently discouraged development.
Housebuilders have faced their fair share of challenges, with bottom lines hit by slower sales, stagnant house prices, rising construction costs and political uncertainty in the UK generally hindering buying activity.
This has driven housebuilders to rethink strategy and take a wider view of their target markets, at a time when traditional buy-to-let investors face greater headwinds. Additional stamp duty for domestic investors and capital gains tax for overseas investors, alongside Brexit uncertainty, have eroded appetite from ‘historically’ typical buyers.
We are therefore seeing build-to-rent (BTR) investors move up the list of desired customers, with more partnerships and joint ventures between housebuilders and institutions with a mandate for BTR, such as our own with Telford Homes.
Forging strong relationships with housebuilders has enabled institutional investors like ourselves to put more capital to work to create diverse and sustainable communities in regeneration areas in line with our social impact targets.
The BTR sector’s growth potential is clear, even if we are only just starting to see the first batch of completions come to market. In London, BTR homes totalled 16,145 in the first quarter of 2019, with 14,212 spread across the regions, marking a 34% annual rise in completed stock, according to research by the British Property Federation and Savills.
Supply/demand imbalance
The number of BTR homes under construction nationwide was up 10% to 37,549, with another 72,184 in planning. However, there is still a long way to go to solve London’s supply and demand imbalance.
Mayor Sadiq Khan’s recent policy guidance suggesting new-builds should include a proportion of affordable housing that isn’t at discounted market rent, which can only be run by housing associations, isn’t a commercial solution. At face value, that model doesn’t work from a control perspective and would be akin to having different hotel operators operating from the same hotel.
There is a lot more work to be done to establish a framework with potential to turbo-charge the delivery of good-quality, affordable housing, but a collaborative approach between housebuilders and institutions is sure to be an increasingly important catalyst in growing the market.
Alex Greaves is head of residential investment at M&G Real Estate
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