Demand for development land in the South East expected to increase

Residential development land values fell further on a national level during the last quarter of 2023, with fewer sites sold and fewer bids received on sites marketed, according to a new report by Savills.

However, greater stability in the housing market and improved sentiment have led to some optimism that demand for land is set to increase if market conditions continue to improve.

Data available from Savills has shown that residential development land values have further softened at a national level over the last quarter, with UK greenfield and urban land values falling by -0.8% and -1.3% in Q4 2023 – taking total annual falls to -6.5% and -8.4% respectively.

Compared to the previous peak in the land market in Q3 2022, UK greenfield and urban land values have fallen by -8.7% and -9.9% respectively.

Lydia McLaren, research analyst at Savills, said: “These further falls in residential development land values are reflective of a subdued new build sales market.

“Private new build sales rates for housebuilders are currently closer to 0.5 per outlet per week than the 0.7 typical of 2016-2022, according to listed housebuilder trading statements.

“Many developers are more cost-conscious at the moment in order to remain as profitable as they can in weaker sales market conditions, which is resulting in less land buying and/or more conservative bid prices.”

In locations with an acute shortage of sites, where developers need to fill gaps in their pipelines, there continues to be reasonably strong competition for sites and land values are proving more resilient, with some locations and sites bucking the national trend, according to the report.

Optimum-sized sites in primary locations where there are few other opportunities remain in demand, and land values in the North and East Midlands, in general, remain robust due to a more resilient housing market, shortage of sites and stronger competition.

Northern greenfield land values are -2.9% lower than in Q3 2022 (with house price growth of -1% in the period).

By comparison, in the South East and Eastern regions, land values are -9.7% and -10% below Q3 2022 due to greater falls in house prices (-5%) and with buyers’ affordability more constrained.

Greater falls in urban land values have been attributed to the associated higher risks and additional build costs to deliver apartment schemes, which has resulted in less demand than house-led greenfield sites.

In London, there have been more distressed sites coming to the market due to lack of viability as a result of changes to building regulations, affordable policy and weaker sales market conditions.

 Fewer sites to sell and sites taking longer to sell

Despite some weakness in the development land market, the ongoing scarcity of land supply is supporting competition for consented and serviced sites in undersupplied markets.

In England, -28% fewer homes were granted planning consent in the 12 months to September 2023, compared to the previous peak in planning consent in 2021, according to the Home Builders Federation.

The fewer sites consented has also led to around 30% fewer land sales at a national level in 2023 compared to 2022, according to Savills.

Sites being sold are also taking longer to progress due to additional caution and due diligence. The buyer pool has become thinner with some parties pulling back from the market and re-assessing deals.

A net balance of 16% Savills development agents reported a decrease in the number of bids per site in Q4 2023, up from 10% in Q3 2023. 

Patrick Eve, head of UK regional development at Savills (pictured), said: “Alongside a reduction in the level of bids per site, there has been evidence of chips in land values on deals over the last quarter from prices agreed earlier in the year and a few examples of land deals falling through.

“However, where parties are looking to fill supply gaps in local markets, bidding remains competitive and there remains a mixed appetite for land amongst different players with some parties out of the market and taking stock of market conditions whilst others look to acquire land in a less competitive market.”

Build costs start to moderate

Over the last year, the rate of build cost inflation has eased, driven by a slowdown in construction demand and a fall in material costs.

Build costs increased by 3.5% in the 12 months to Q4 2023, in comparison to 9% in the previous year, according to BCIS, however, some builders have even reported falls in costs in Q4.

Further easing in build costs is anticipated with BCIS forecasting a 2.1% increase in the 12 months to Q4 2024.

However, there are additional development costs for parties to manage which include building safety requirements (secondary staircases) and environmental standards such as the Future Homes Standard, set to be implemented in 2025, and Biodiversity Net Gain, which has seen further delays to its implementation.

Cautious optimism 

Looking ahead, Patrick said: “It’s challenging to predict where the development land market is heading given the ever-shifting variables in the housing market but there is some cautious optimism.

“The recent falls in mortgage rates and greater stability in the housing market have resulted in sentiment in the land market starting to improve slightly, therefore we expect demand for land to increase in 2024 if housing market conditions and sales conditions continue to improve.  

“UK house price growth remained flat in December, taking 2023 annual house price falls to just -1.8% according to Nationwide.

“In the short term, we expect some more new sites to launch onto the market in the first half of this year due to more positive market conditions.

“However, the supply of land is likely to remain constrained in the short to medium term due to the continued slowdown in the number of sites granted consent.

“Continued uncertainty around planning policy, including the removal of five-year housing land supply requirements for local authorities with recently adopted Local Plans, announced in the revisions to the NPPF in December 2023, will add further pressure on supply.

“And levels of competition in the land market will likely remain muted until all the major housebuilders become more active.

“With considerable variation in the size of the major housebuilders’ land pipelines, we expect some housebuilders to increase their activity in the land market earlier than others in order to replenish land pipelines which will boost competition for sites.”

Sam Kirkaldy, head of development at Savills Sevenoaks, added: “The outlook for development land in 2024 is encouraging given the base rate/mortgage outlook and particularly for consented sites, with a lack of planning permissions coming through the local authorities. 

“We have seen selective bidding on development land over the last six months but envisage more coming back into the market along with new entrants from the single-family rental sector, for example.

“As ever, sites in good locations suitably de-risked in terms of technical and environmental constraints trade faster than those where problems have not been addressed.”

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