London’s housing market is facing a shortfall of more than 61,000 new homes over the next three years, due to a slowdown in planning activity and construction starts, with delivery falling below the current London Plan targets. 

New research by CBRE UK has revealed planning activity in London has fallen to its lowest level since 2010. The number of new applications submitted and granted, as well as construction starts, totaled 21,918 homes in the first half of 2023. 

Notably, the number of planning applications submitted in Q2 of this year fell to just 2,061 homes - the lowest quarterly figure ever recorded. If the second half of 2023 continues at the same rate, the market will end the year with applications for approximately 11,800 homes, 47% below the previous trough recorded in the wake of the Global Financial Crisis in 2010. 

Prime Central London (PCL) is the one market that has recorded an increase in permissions granted, up 90% year-on-year*. Planning for 989 homes has been granted in PCL in the first half of 2023, which is greater than the annual totals of the last six years. Completions are also up 44% year-on-year*. 

Julien Mills, head of New Homes at CBRE said: “Planning regulations, inflated construction costs, the cost of debt, and buyer affordability on borrowing and purchase taxation have all influenced the new homes development and second-hand markets recently. However, we need to continue to build more homes to address the supply-demand imbalance that exists in London.” 

“While there might be fewer active buyers in the market right now, there are many who are still active and are serious, many of whom are in strong financial positions. Again, those with cash reserves are utilising these in favour of higher LTV borrowing, minimising their exposure to higher mortgage rates. All buyers are still very much drawn to quality homes, offering true value for money and we are still seeing strong interest and activity across those homes from both overseas buyers as well as domestic purchasers.” 

“That being said, the narrative behind the draw of a home needs to be compelling. It is fair to state that needs-based buyer motivation is probably the most active buyer group although there is some investor commitment given the recent rental market performance. There’s consequently still opportunity for developers.” 

He continued to underline that pricing and affordability remains a key factor in the sales success of all homes, with competitive asking prices attracting the most demand. 

Meanwhile, the Build-to-Rent (BTR) sector is proving to be robust and is supporting the demand for new homes in London. In the first half of the year, BTR ‘sales’ accounted for 33% of all new-build homes sold, and while down slightly compared to H1 2022 (38%), it is in line with H1 2021 volumes. 

In tandem, BTR investment levels have exceeded the long-term average in the first two quarters of 2023. The high levels of occupancy and supply-demand imbalance are two fundamentals driving rental growth, which makes the sector an attractive investment proposition. 

Scott Cabot, head of Residential Research at CBRE, said BTR is expected to play an increasingly important role in London’s rental supply, with the sector absorbing new homes into the market. 

“As we wait for a turn in new homes sales activity, housing delivery in the capital could be supported through BTR, and this sector is proving to be robust. While completed BTR units currently only make up around 4% of rental stock in London, we expect this to increase over the coming years.”