Prime resi pipeline up 40% as demand eases

The projected number of units to be built over the next 10 years increased by 40 per cent as of 2015 compared with 2014, when the number of luxury homes planned for London stood at 25,000.

The findings come as demand for high-end property in the capital begins to ease and construction costs continue to rise.

As a result, developers may begin to shift their assets away from prime residential to offer more mixed-use or office space to boost their profit margins, the research predicts.

Developers may also increase the number of smaller and more affordable units on schemes because they are easier to sell, Arcadis head of commercial development Mark Cleverly told Construction News.

Mr Cleverly said rapid shifts in the market such as stamp duty changes and an economic slowdown in China were also placing pressure on developers.

“Although stamp duty is a tax on purchasers, on the ground some developers are experiencing buyers making discounted offers for their properties [to counter the tax],” he said.

“So a developer is facing buyers making deals at the top of his appraisal while still having to offer affordable housing contributions and CIL payments at the other end.

“It is a squeeze on developers and [could] potential [have] a negative impact on margins, which means there’s more hard work to be done to make these schemes viable.”

Growth of homes in development, 2011-15

  • 2011 9,119
  • 2012 15,503 (+70%)
  • 2013 20,000 (+29%)
  • 2014 25,000 (+25%)
  • 2015 35,055 (+40%)

Mr Cleverly said developers were responding in different ways to the changing market, with a number of his clients having “strategic reviews” around the costly interior design and fit-out specifications on schemes.

“There’s a big focus on cost optimisation at the moment so we are able to maintain the viability of these schemes in a changing market.”

Arcadis estimates that clients are targeting 10 per cent cost savings in the prime residential sector, Mr Cleverly said.

“Right now clients are looking for best value through the procurement process, so anything contractors can do to mitigate that is crucial,” he added.

“Developers are looking at the balance of the cost between the shell and core and the fit-out [to see if] they have got that right.”

He said there was a reluctance from contractors to take on lump-sum risk for fit-out work, with many contractors opting to sign a shell-and-core lump-sum contract on a design-and-build basis.

“There is probably a consensus between clients and contractors that on a long programme it’s not wise to buy the fit-out too early because you will end up paying a large premium or the contractors that you’ve had price it, they might not be around in a couple of years at that price at the time when you want them to deliver.”

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BDC 305 Jun 2023