Whilst a very limited supply of unsold new homes in inner London has pushed prices to new levels, Savills' London Residential Development Survey suggests that the anticipated increased supply levels, particularly in the East could have an effect on future values.
Against a backdrop of increased average asking prices of 14 per cent across the whole survey area during 2006, the highest priced units located in and around Knightsbridge sold for up to £2,500 per square foot, a price level already exceeded on the very best schemes this year, where high demand from equity rich international and City buyers pushed up prices.
High prices at top end of the market
In contrast, lowest average asking prices were found in the eastern area of the survey in locations including Hackney and Bow, although even here average prices per square foot of have exceeded £400 per square foot, including an average price of just less than £250,000 for a one bed flat. However within the eastern area, the Central Docklands area has moved up the rankings with some units breaking through the £1,000 per square foot level, as high quality new stock has pulled in demand.
Evidence suggests that Canary Wharf is performing as a prime residential area with future price growth likely to outperform that of other eastern areas, as continued occupier and investor demand is attracted to what is now an established, maturing location.
Our analysis shows that at the end of last year, new units available to buy on the open market were down by 68 per cent year on year, with 1,160 private units openly marketed on 117 developments in the entire survey area. However it is likely that the second half of 2007 will see an increase in marketing, with 8,600 private units coming to the market within our survey area, compared with the 7,200 units per annum recorded for the past two years.
We anticipate that this increased supply will extend into the next three years with a peak in 2009 as developers look to tap into demand before the Olympic Games in 2012. This level of growth brings risks for developers especially in areas to the East of the City where 71 per cent of units is set to be located – where recent experience in Docklands markets could be repeated, but more intensely.
Output rise over the next three years
Jim Ward of Savills Residential Research commented: “The high and rising supply of new homes in this location has diluted the upward pressure on prices seen in more supply-constrained markets and has meant that, despite continued purchasing activity, capital growth since 2002 has been very low in most locations until very recently. However, the exceptions to this in Butlers Wharf and Canary Wharf have shown that, as places mature, with higher demand from a wide occupier base and constrained supply, they display higher price growth in both the rental and sales markets.
“Much of this new supply in the East will be taken up by both investors and owner occupiers, as employment driven demand spills out from more established markets. But the sheer scale and concentration of the extra supply means that the least successful schemes will be competing on price, putting pressure on development viability at a time of rising land prices, rising construction costs and higher developer contributions via Section 106 agreements.
“So the challenge for developers in these high supply markets is to create the sort of place, with the right mix and density of residential, commercial and leisure uses and public realm, to pull in high levels of demand from a range of occupiers so that demand is enhanced rather than deflated as the place matures.”
