Land market has been favourable for house builders, but rising demand could tip the balance

24 January 2018

Reduced competition in the residential development land market, and increasing supply of consented land, have created benign conditions for the major housebuilders over recent years, according to international real estate adviser, Savills.  But demand is growing and market conditions could change, the firm’s analysts state.

Since the global financial crisis the sector has focused on controlled growth, in large part replacing land built out with permissioned land from their existing strategic pipelines. 

The number of consents granted in England rose by 16 per cent in the year to the end of June compared to the previous year, for now supporting the benign market conditions and allowing major housebuilders to buy land at or above their hurdle rates. 

As a result, greenfield land values have remained relatively flat, ticking up by a marginal 0.1 per cent in the final quarter of 2017.  Annual growth totalled 1.7 per cent, in line with 1.8 per cent in 2016.

Over the past five years, average greenfield land values across the UK have risen by a total of 21.2 per cent, significantly below new build house price growth (see chart below), while the number of housebuilders registered with the National Housebuilding Council stands at less than half (46%) the average in the 12 years pre credit crunch decade (see chart here)

Source: Savills, Nationwide NB: Land values exclude London

“For now, land market conditions remain benign for major housebuilders, but they face increasing competition from other players, both for strategic and shorter term land, ready to build out,” says Emily Williams. 

“The Government’s desire to see 300,000 new homes a year built in England – a 38 per cent rise from where we are now - will obviously boost demand for land.  To maintain benign conditions, therefore, we need to see much more land being brought forward, with more planning consents in the areas where demand is highest.”

In geographical terms, the fastest growing markets are in the north of England and Scotland, where greenfield land values rose 4.2 per cent and 2.7 per cent respectively in 2017.  This is underpinned by strengthening housing demand in these relatively affordable markets.   Savills five year forecasts anticipate house price growth of 17-18 per cent in these two regions, ahead of the 14 per cent average for the UK and more than double the 7 per cent uplift forecast for London.

Homes England (formally HCA) investment has been supporting developments across the country, with investments in sites in the north has really helped boost confidence, according to Savills land agents.

Increased competition from a range of players:

Strategic land is now a focus for a range of developers and investors.  In the past year, Savills advised on the sale of several strategic land portfolios totalling 60,000 residential plots and the major housebuilders are now buying more of this longer term land.  Last year they bought 9 per cent more land through Savills than in 2015, in a combination of consented and strategic land.

Medium-sized housebuilders are increasing their activity given more attractive operational margins and improved availability of finance, buying 10 per cent more plots through Savills last year than in 2016 and 54 per cent more than in 2015, albeit they are coming from a low base. 

Housing associations have also become more competitive in the market and probably represent the biggest potential additional source of demand for residential development land, Savills says.

This is contributing to rising urban land values.  Across the UK as a whole, urban development land values rose 0.5 per cent in the final quarter of 2017 and 4.0 per cent across the whole year, more than double the growth in greenfield land values.  Manchester was the standout performer.  Urban land values in the city rose by 24 per cent in 2017, well ahead of house price growth of 8.6 per cent (year to Oct 17), over double the 4.2 per cent UK average.

At the same time, London developers have been moving beyond the capital, supporting or pushing up land values in markets such as Woking, Guildford and Chelmsford, often building flats for London commuters seeking more affordable accommodation. 

The Oxford - Milton Keynes - Cambridge corridor will require a million new homes by 2050 if it is to fulfil its economic potential.  As part of this drive, the government has announced a package of support for new infrastructure and economic growth in Oxfordshire, to target delivering 100,000 homes by 2031.  Much of the land around Oxford is already under promotion, but landowners will be looking for development partners in due course.

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