Shortage of sites props up land values amidst more challenging outlook
Land values have been supported up to now by a shortage of sites and continued for land from a range of parties across all tenures. Savills latest development land index reveals that UK greenfield and urban values increased by a further 0.6% and 1.1% in Q3 2022 (three months to 15 September 2022), taking annual growth to 6.3% and 6.2% respectively.
|Q3 change||Annual change (to September 2022)|
Source: Savills Research
“Growth of the land market continues to be supported by an ongoing scarcity of sites, especially as delays to Local Plan production persists in some areas, in combination with under-resourced planning departments and the issue of nutrient neutrality in affected markets,” comments Lydia McLaren, Savills research.
“But now mounting pressures are starting to subdue growth. After a period of exceptional strength, house prices have started to slow, build costs are continuing to rise, the cost of debt is increasing and Help to Buy is ending. In September, UK house prices remained flat (0%), taking annual growth to 9.5%, according to Nationwide. Looking forward, increased tender prices are unlikely to be offset by house price inflation.”
“However, there remains a significantly undersupply of homes and strong rental demand, with rents up 11.9% on the year in August. This means that there remains a need for more housing for sales and rent in the right places, which should safeguard against any significant falls.”
Demand for land is shifting
General land market sentiment has become more subdued over the last quarter. A net balance of +40% of Savills development agents reported positive market sentiment in Q3 2022, down from +74% in Q2 2022.
As a result, the number of bids per site has eased slightly with a net balance of -20% of Savills development agents reporting an increase in bid levels compared to the previous quarter. Growing concern about the future demand and pricing for new homes has led many developers to become more selective, and as major housebuilders focus on securing larger sites of 100+ units within the core markets, instead of smaller sites in ‘out of core patch’ locations.
However, Savills reports that appetite is growing for tenures such as Single Family Build to Rent as housebuilders look to de-risk sites and deliver a more diversified range of tenures. There is also growing evidence of Single Family Build to Rent transactions in regional markets such as Oxfordshire, East Anglia and the East Midlands.
“Recent disruption to the UK economy has impacted the land market in the short term, leading to deals taking longer, renegotiation, and even development finance being withdrawn or paused in some cases. Market headwinds, including cost inflation and the rising cost of borrowing, are likely to have a more significant impact on smaller to medium-sized housebuilders, especially if they are highly geared,” says Patrick Eve, Savills head of regional development.
London’s two-tier land market
Land values in London face downward pressure from a combination of slowing house price growth, rising build costs, enhanced building standards and increased affordable housing requirements.
According to Savills development land index, central and outer London residential land values fell by -5.8% and -7.2% in the six months to September 2022, taking annual falls to -6.0% and -7.5% respectively.
But as is the case in the regions, stock constraints continue to sustain competition to some extent, and well-design sites in primary locations remain highly sought after and continue to trade at previous levels of pricing. In contrast, more challenging sites located further away from transport hubs are struggling to maintain similar levels of competition and pricing.
In these areas, seller’s expectations of values remain high, with limited evidence of landowners under pressure to sell, and many holding onto their sites.
|Six-month change||Annual change (to September 2022)|
|Central London residential||-5.8%||-6.0%|
|Central London office||0.0%||7.6%|
|Outer London residential||-7.2%||-7.5%|
|Outer London office||-4.7%||-0.9%|
Source: Savills Research
“A lack of grid capacity and the ability and timing of securing utilities connections on sites including electricity, water and gas, are becoming more prevalent concerns for parties when buying land in some markets.
“Until capacity is significantly expanded and with pressure on the grid only set to increase, limited access to power and utilities on sites has the potential to impact the viability and deliverability of sites, in particular large sites that have significant power and infrastructure requirements,” concludes Savills’ Lydia McLaren.