Pressure on the construction industry is set to increase as London’s prime residential pipeline passes 20,000 units over the next ten years.
Research by EC Harris highlighted emerging pressures around a “profit squeeze”, which it said developers and investors needed to become “increasingly aware of”.
The ‘squeeze’ referred to a slowdown in rising London sale prices balanced with the construction industry’s ability to accurately predict tender prices.
The firm predicted a 30 per cent year-on-year pipeline increase in the sector, equivalent to around £50bn in sales.
EC Harris said that as volumes have started to increase, housebuilders have seen pressure on costs first and that there would be increasing pressure on developers not to overpay for sites and to get their construction cost forecasting correct.
The largest areas of pipeline increase in London on a year-on-year basis were South Bank, Chelsea and Fulham, City & Fringe and Victoria & Pimlico.
EC Harris also noted that in many of these areas, competing land uses and the trend towards the switch from commercial to residential remained a “consistent theme”.
However, this was not a result of office conversions through Permitted Development Rights legislation changes, rather outright redevelopment of existing sites. Overall, the pipeline showed little in office to residential conversions.
EC Harris said that the market was coming to “a critical juncture” at the lower end of the prime range where it could no longer be a given that you should “spend more to make more”.
Mark Farmer, head of residential at EC Harris, added: “We firmly believe there is fantastic opportunity in the London prime residential development market and the fundamentals are still overwhelmingly strong. We would temper this though with the need to recognise the reality of a volatile market where strong, professional advice combined with track record backed intuitive judgment is key to making the right decisions.”
Six main strategies to offset the potential ‘squeeze’
1. Develop thorough control processes: Clear development control processes which test all aspects of the client’s brief against the reality of market demand.
2. Leverage scale with the supply chain: Work more closely with the supply chain to plan resource requirements and business plans.
3. Use hybrid procurement paths: Allow the main contractor to take care of the ‘core’ process, with more of a “housebuilder approach” to the fit out trades.
4. Strengthen project handover: Establish stronger contractor and client side project handover controls.
5. Innovate: Approach international materials sourcing and the value chain innovatively.
6. Accurately forecast cost inflation: Produce accurate cost inflation forecasts, taking the other five points into account.