Will London property investment crash because of oversupply?

Property investment potential is still huge in London: here’s why.

Off-plan property investment opportunities in London have been among the best-performing markets in the UK. Still, I get asked on a regular basis if an oversupply of apartments in the capital will cause investors big headaches as they come to completion. The answer, of course, is that oversupply is never good for property investors. Then again, the real answer lies in answering the question, is the London property market oversupplied, or have newspaper hacks created a non-existent upcoming catastrophe for property investment in London?

Anxious investor calls

In March last year, I fielded a call from an investor who was concerned by a report he’d recently read in The Guardian newspaper. It’s fair to say that the headline, “Glut of new-build properties leads to falling premiums in central London”, gave him the shivers.

When he read that a London property investment firm was predicting that oversupply in Battersea and Nine Elms would lead to a “significant softening of prices for the foreseeable future,” he was horrified. The company had analysed the London market and estimated that more than 75,000 properties were in the pipeline. It would create “a risk to buyers of a substantial oversupply of such units, both to buy and to rent, suppressing yields and prices.”

He asked my opinion, and I told him that I thought the whole story was unnecessary scaremongering. The recently released IPPR report stated that the long-term demand for new homes in the capital is 50,000 per year. During the past decade, only 194,000 new homes had been built in London. I told him not to panic. My belief was that while demand at the luxury end might erode, demand at the more affordable scale would remain.

Last week that investor completed on an off-plan property he had bought in Battersea. Last year he was worried that there would be no capital gain on completion. According to home.com, this is almost exactly as things have panned out in Battersea: over the last 12 months, the median asking price of a Battersea apartment has increased by 11%, while the average price of a large detached home in the area has fallen by 12%.

New property supply crashes in the capital

Little more than a month after The Guardian article had spooked investors, the same newspaper published an article that supported my analysis. That article reported that:

  • The rate of ejected planning permissions had doubled from a year earlier
  • Applications from developers had crashed from 14,400 to 7,050 in the first quarter of 2016 when compared to the same period in 2015
  • If planning permission continues at the same rate, just 17,290 new homes in the capital will be in the pipeline in 2016 – that’s some way below the 50,000 needed

An article in the Daily Telegraph a few months later(September 2016) reported that the number of home starts in London during the first two-quarters of 2016 had fallen out of bed. Second-quarter starts were down by 65% in the fourth quarter of 2015, a cumulative fall of 58% during the first half versus the first half of 2015.

So, by the third quarter of 2016, demand was still predicted at 50,000 new homes for the year and supply was predicted to have fallen to around 17,000.

‘Fifty Thousand Homes’ research confirms the crisis in London

Recent studies from the ‘Fifty Thousand Homes’ campaign has provided startling evidence of just how big a gap there is between supply and demand for new build property in London. The problem is so big that the Mayor of London, Sadiq Khan, has stepped in with a pledge to tackle the issue head on. The London Mayor said:

“It's unacceptable that so many hard-working Londoners continue to be priced out of their own city – it is bad for Londoners and bad for the future economic success of the capital. I am determined to tackle the housing crisis head on, and I will be using my new planning rules and my record funding deal with the government to build new affordable homes to rent and buy.

“We know that building new homes to tackle the housing crisis won’t happen overnight – it’s a marathon, not a sprint – but in the meanwhile, we need to do whatever we can to help Londoners struggling to meet the soaring cost of housing. That’s why I am pleased to announce City Hall, and the entire GLA family is now committed to offering tenancy deposit loans to staff, and I would urge all London businesses to sign the Employers’ Pledge on housing too. We must do all we can to retain and attract the best talent in our capital and to make sure we remain a city for all Londoners.”

The Mayor of London urging London businesses to offer tenancy deposit loans to staff, and leading by example? Music to property investors’ ears.

However, it’s the deeper research by Fifty Thousand Homes that gets my juices flowing. It confirms that 50,000 new homes are needed each year – a number that is being missed by a colossal amount at present. But get this: the accumulated housing shortfall in London has quadrupled since 2010. It now stands at 210,000 and has been caused by:

  • A growing London population
  • A growing London economy
  • A failure to build enough new homes year after year

Hands up if you think that the London population will stop growing, or the London economy will collapse, or developers will quadruple their new build starts. Me neither, on all three counts.

London off-plan property investment is alive and kicking

The conclusion is that the London property market is alive and kicking, and that oversupply is not a problem per se. However, this doesn’t mean that oversupply won't hit some locations or property types – the key to buying in the best places to invest in property UK is always going to research. (By the way, I just spoke to Ryan Rahnavard, Associate Director here at Gladfish, who deals with London property investors all day every day – you can watch what Ryan had to say in this video.)

Discover more about our property research that pinpoints the best places to invest in property UK using a unique 108-point dataset across 324 areas – we call it the ‘Hotspots Algorithm’. Contact one of our team today on +44 (0)207 923 6100, and we’ll be happy to discuss why we think 2017 is going to be another exceptional year for off-plan property investment in the UK.

Live with Passion

Brett Alegre-Wood

STOP PRESS! CBRE has just announced a revision to the need for new homes. It says that London now needs to build 52,000 new homes per year and that only 300,000 are planned in the next decade.

Brett Alegre-Wood
February 14, 2017

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