In Q3 2023, Molior reported that construction starts were down -74% on the 10-year average, while completions were down -37%.
The number of units started in Q3 2023 across London have almost halved compared to the previous quarter, with the largest falls seen in zones 2 and 4-6.
Numerous regulatory changes have impacted development activity, with more schemes pushed in Q2 2023 to beat the latest changes. After the June 2023 deadline, developers have to adhere to more stringent energy efficient and carbon emissions standards in new homes.
When we compare the number of construction starts for build for sale (BFS) and build to rent (BTR), it is evident that the most significant fall in starts is BFS units; in Q3 2023 there were just 998 BFS units started across London, down from 3,519 in Q2.
Q3 2023 saw a marginal rise in the number of BTR units started, accounting for 30% of total starts across London, up from just 5% in Q2. On average over the past five years, BTR starts have accounted for 29% of total starts across London.
It has become increasingly difficult for buyers to get a foot on to the housing ladder in London, resulting in increased demand for rental property across the city. It is crucial that the trending rise in the number of BTR units started continues, in order to satisfy demand for new rental stock.
The lack of new construction starts will have a knock-on effect on new homes stock across London, with the sustained lack of new housing starts meaning new homes risk becoming scarce commodity in the capital. Central London is likely to suffer most from lack of new homes being delivered. The number of units under construction across zone 1 was at the lowest level seen over the last six years in Q3 2023, and half the quarterly average in the three years pre-pandemic (2017-2019). The latest Molior data recorded just 26 construction starts across zone 1 in Q3 2023.
Units started by London underground zone
Supply difficulties across London are not likely to ease anytime soon
Unfortunately, the lack of new housing construction does not look set to ease anytime soon. JLL's latest residential forecasts (2024-2028) were released in November and include housing construction forecasts. Nick Whitten, Head of UK and EMEA Living Research expects “the rate of undersupply will result in a cumulative shortfall of 720,000 homes between 2023 and 2028”.
The report identified five barriers to new supply; build costs, financing costs, construction capacity, land availability and building regulations. There have been nine changes to UK building regulations within the past three years alone. Not only have these changes caused greater uncertainty, but alone have increased build costs by around 15% during this period (2020-2023).
Rising construction costs and supply chain pressures have added further pressure. The UK construction index has risen +25% compared with pre-pandemic, while the cost of cement, timber and glass is up +35%. This continues to challenge the viability of schemes.
JLL have outlined construction capacity as another barrier to supply. Approximately 1 million of the 2.5 million construction workers in the UK are employed in housebuilding. But Make UK estimate there is a shortfall of circa 1 million workers required to meet UK housebuilding targets. This is before we even dig deeper into the number of workers expected to retire within the next decade.
More recently, new data released by the S&P Global/ CIPS UK construction PMI shows construction activity contracted in October. This has largely been driven by viability concerns; a sharp contraction in housebuilding off the back of rising interest rates and higher borrowing costs.
Light at the end of the tunnel
With bank rates held at 5.25% for the second time in November, most expect we have seen rates peak. However, rates rising from 0.1% to 5.25% in 18 months requires significant adjustment; the UK base rate increased at the fastest pace in history. It has also reduced the number of people able to buy, with higher rates challenging first time buyers and mortgaged investors.
However, as rates begin to fall and purchasers return to the market, we do expect the viability of projects will improve. Despite this, there could still be a lack of completed and completing stock to satisfy demand.
Encouragingly, there is evidence that developers are preparing to increase activity once conditions improve. The number of applications for residential developments rose 65% from Q2 2023 to Q3 2023 (2,165 units to 3,582 units). Although this still lags historic norms, it is certainly a step in the right direction.
About JLL | November 2023
JLL is a leading global professional services firm specialising in real estate and investment management, with $16.6bn annual revenue in 2020, operations in over 80 countries and a global workforce of over 90,000. With over 7,000 employees and 15 offices in the UK, we support our investor, developer and occupier clients at every stage of the property lifecycle across both commercial and residential asset classes. This includes land purchase, access to capital, planning, development advisory, leasing, building management and sales.
JLL’s Residential and Living team consists of over 300 professionals who provide a comprehensive end-to-end service across all residential property types, including social housing, private residential, build to rent, co-living, later living, healthcare and student housing.
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