Political uncertainty affecting residential development land prices

Average greenfield development land prices fell by 0.6% year on year in the first quarter of 2019, the first annual decline in two years and likely due to Brexit uncertainty.

Urban brownfield land values increased by 0.8% during the quarter, moderating the annual decline to 0.2% but in the prime central London development land market values were down by 2%, taking the annual decline to 7.5%.

According to the residential development land index report from real estate consultants Knight Frank house builders are seeking to protect their margins to account for future risks, particularly in the South East.

It also points out that construction costs, including materials, plant and labour, have climbed 14% over the past three years, according to the ONS.

Patrick Gower, residential research associate at Knight Frank, said:

‘Any further weakening of the pound could make importing building materials more costly, which could be compounded by reported Brexit-related stockpiling.

‘However, the most significant factor weighing on greenfield land values is house builders’ caution over possible conditions in the sales market in three to five years’ time due to the acute political uncertainty in Westminster.

‘As a result, competition has been particularly strong for well-connected sites with strong demographics, often on the edge of market towns. Volumes dipped during the 18 months following the 2016 referendum and housebuilders are now seeking to replenish their land supply.’

Indeed, the reports shows that this trend is being mirrored in prime central London, where values dipped 2% during the first quarter and declined 7.5% during the year to March.

Gower said:

‘Demand has been robust for competitively priced sites in the best locations with rental income already in place, though in the wider prime central London land market investors are grappling with how to accurately price sites amid so much political uncertainty.

‘In addition, the risk of planning delays in central London has grown in the past two years. Councils and the Greater London Authority at times have differing priorities regarding the proportion and mix of tenures required when negotiating section 106 agreements, which adds another layer of complexity in an already challenging prime central London market.’

He also explained that the current lack of clarity caused by events in Westminster is being offset by the certainty provided by the Help to Buy Equity Loan scheme, which the Government announced in November will be extended.

Gower concluded:

‘Economic uncertainty coupled with the complexities of the planning system and rising build costs exerted pressure on land values at the turn of the year. However, developers seeking to maintain a healthy supply of land and take advantage of value prompted ultra-competitive bidding for a handful of the best sites on the market.’

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