Property development land prices in urban areas increase

Urban development land continues to outperform greenfield land values, rising by 1.5% in the last three months of 2015, while greenfield values rose by 0.7%, taking annual growth to 7.1% and 2.0% respectively.

A new report from Savills World Research, UK Residential Development Land, notes that the increase in urban land values reflects a rise in demand, due to an improved economy, stronger markets and increased viability.

The value of development land is thought to have remained balanced due to the increase in supply of new permissions (an annual increase of 21% from 2010 to 2015 in Great Britain), along with a decrease in new housebuilders (46% fewer housebuilders registered with NHBC in 2015 versus 2005), thereby reducing competition for sites.

The report found that strong demand for homes in urban and well-connected locations, such as Birmingham and Coventry, also played a part in the increase in urban development land values and can be linked to a shift in the type of homes being built.

“Between 2008 and 2014 houses accounted for an increasing proportion of new build homes, however, since March 2014 this trend has been reversed and we are seeing flats accounting for higher proportions of delivery (35% in the year to March 2015 up from 29% the previous year according to DCLG completions).

The change in type of home being built reflects the improving viability and ability to finance denser sites,” the report states.

The overall market may remain subdued however, due to uncertainty surrounding recent government policy announcements relating to affordable housing provision and the land value implications of the requirements for Starter Homes.

Additionally, while listed housebuilders continue to perform strongly, publishing positive trading updates showing an increase in both their output and profit, their appetite for new land acquisitions has not matched this.

Instead of increasing their acquisition of new land some of the biggest players have been able to meet requirements by converting their existing strategic land sites into permissioned plots.

The report notes:

“Due to this expansion in output it would be expected that demand from major housebuilders for development land would increase pushing land values higher. However, an increasing proportion of the land they are building on is from converting strategic sites to serviced land with planning permission. For example, between 2012 and 2015 Barratt increased the proportion of land sourced from such conversions from 5% to 24% and Bellway from 51% to 71% over the same period.”

Meanwhile, small housebuilders are reported to be struggling to increase their contribution to the industry. According to the NHBC, private starts by smaller housebuilders have been in decline for the last six months.

A recent report by Funding Options suggested that this was in part due to the lack of links between small property developers and specialised funding.

This may change in the near future due to the government’s announcement that it will directly commission SME housebuilders and property developers to deliver homes on publicly owned sites.

However, the report warns that while the release of the public estate will increase the supply of development land, the location and time of release will determine how it affects land value.

In under-supplied areas the new land may be absorbed into the market with little impact, but if not carefully managed a large supply of land in a well-supplied market will put downwards pressure on land values.

Jim Ward, Savills Research, said:

“In general, markets remain in balance as a result of uncertainty over policy and ample land supply relative to builder appetite.”

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