Wary buyers dictate price of residential development land

09 November 2016

Residential development land value growth has stalled across most of the country as the market settles after the EU Referendum, though areas of strong demand and value growth remain in outer London and key regional centres, according to the latest Savills residential land index.  Central London, which operates as a distinct market, has seen more marked price falls.

Most locations have seen land values plateau, though transaction volumes have decreased. UK Greenfield land values, excluding London, fell marginally (-0.4%) in the third quarter of 2016, but remain 2.0 per cent up year on year.  Urban land values are more robust from a lower base, up 4.0 per cent year on year. 

The biggest falls have been seen in central London. Falling house prices have reduced residential land values by-8.9 per cent in the past six months, the largest drop since 2008/9, bringing year on year falls to -10.2 per cent.  This exceeds falls seen for office development land, which fell -5.9 per cent in the last six months and -5.3 per cent year on  year, reflecting the combined effect of stamp duty on high value homes and the impact of the Brexit vote on sentiment.

In outer London, where house price affordability is less stretched and markets less impacted by stamp duty, demand for land remains strong and values more robust, particularly where new build sales values are between £450-850 per square foot.  Demand for Greenfield sites in commutable locations west and north of London including Milton Keynes, Newbury and Reading is also strong.

Further afield, demand is underpinned by investors who were previously heavily focused on London. Stand out markets include Bristol, where housing delivery has failed to keep up with city growth creating competition for sites, and Birmingham city centre, where regeneration stimuli such as HS2 and demand for build to rent have supported higher land values. 

The small shift in the UK wide index (excluding London) reflects price falls in a few locations including Kent, Cornwall and Scotland.  In Kent, a county normally dominated by major housebuilders, corporate level caution has reduced competition for sites.  In Cornwall and Scotland,  while volumes have been maintained, higher margin requirements are reducing values.

Outlook:

The Savills survey of land agents across England, Wales and Scotland points to increased risk aversion amongst buyers, with land agent sentiment at its weakest level for three years. However, while a majority of agents are ‘neutral’, very few (<5%) are negative. 

“Caution is a clear theme of the current land market and we now wait to see if this translates into lower volumes or values this autumn,” says Jim Ward, director Savills residential development research.  “But in the long term, demand for homes will continue to rise, even if net migration is reduced significantly, and those housebuilders that have not been buying land will need to do so soon if they are to maintain volumes. 

“For now, they are expected to continue to favour lower risk, smaller sites, with larger site acquisition focused on locations where house prices continue to rise. Sellers of other sites will need to factor buyer caution into their pricing.”

External factors will also influence the land market.  The HCA’s £3bn Home Builder Fund and £2bn Accelerated Construction scheme will help bring forward sites by providing loans to fund projects and speed up delivery of homes on publicly-owned brownfield land.  A mix of tenures will need to be delivered to ensure absorption on these sites.

Build costs are already reported to have risen in light of the fall in sterling for those sourcing materials from outside the UK.  In general this affects all developers, but with least impact on the very largest housebuilders who can secure UK based supply chain due to their scale.

 
 

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