Price of land for building homes in urban areas in UK rising faster than property prices

Land for house building in urban areas in the UK has risen by 4.7% year on year, more than the prices of homes, with developer demand for large sites pushing up values.

But land values in central London have fallen in line with a fall in prices in the prime property market in particular, according to the latest analysis report from real estate firm Savills.

Meanwhile, national and regional house builders are expanding and diversifying with some moving into new regions to take advantage of house price growth in areas such as the Midlands and north of England, the report points out.

‘Manchester and Birmingham continue to outperform the UK average and are now joined by smaller locations such as Luton, Coventry and Chelmsford in seeing double digit annual price growth for urban land,’ said Lucy Greenwood, Savills research analyst.

‘This quarter’s indices are further evidence of growing demand for land in London’s outer commuter belt and beyond, with increased caution in the capital,’ she added.

The report explained that growing house builder confidence and appetite for larger sites is reflected in the rate at which greenfield land values have begun to rise, up 1.1% in the third quarter, as much as in the first six months of the year, taking annual growth to 2.2%.

While land values have risen at a UK level, they have continued to fall across central London, following the pattern of house price growth in the capital’s prime central housing market. The value of land for housing fell by 2% in the last six months, in line with a 2.1% fall in prime London house prices in the same period.

A succession of stamp duty and other tax increases have left house prices in these high value markets down by a total of 15% from their 2014 peak, albeit they now appear to be finding a level. Residential land values have fallen by around 12% over the same period.

The report points out that in August 2017, the London Mayor’s Affordable Housing and Viability Supplementary Guidance (SPG) was adopted but so far this is does not appear to be affecting land values for consented sites in the capital. But Greenwood said it has added to buyer caution. ‘The rate of absorption of new build stock and the availability and cost of labour will be key determinants of future land values,’ she added.

National house builders including Barratt, Persimmon, Crest Nicholson and Miller, plus regional housebuilders such as Wain Homes in the Bristol area and Story Homes in the Manchester area, have either opened or are planning to open offices in new regions.

For some, this means reopening offices in areas where they closed operations post global financial crisis, while others are branching into new territory to diversify and mitigate against regional fluctuations in house prices and demand.

The report says that this expansion has been facilitated by rising numbers of new homes completions. There was a 56% increase in the delivery of market homes for sale by developers in the three years to the end of 2016 and the 2016/2017 new homes total for England is expected to hit 210,000. Planning consents are also up by 11% per cent in the year to June 2017.

Additionally, the Government’s recent announcement that a further £10 billion will be invested into the Help to Buy equity loan scheme, is expected to translate into greater confidence in buying land for building out to 2021.

Savills has already called for much more land to be brought forward to reduce competition for land in high demand areas. This would impact land values but allow developers to build in volume, at prices the mass market can afford, thus enabling large sites to be built out quickly. However, this would also limit the capacity for sales proceeds to fund infrastructure and affordable housing via section 106 and CIL contributions, so would require policy flexibility.

The report also shows that office land values in central London fell by 1.6% in the last six months, taking annual falls to 3.3% with three key factors, rising building costs, Brexit and access to debt finance for development impacting values.

However, developments where at least half of the floor space is pre-let are going ahead, and there is more confidence in areas without a strong focus on finance of European Union related occupiers.

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