Greenfield land values are at their highest since 2008, but new environmental regulations are likely to limit growth over the next five years
- Greenfield land values are forecast to grow by 4.4% over the next five years, a similar level to the period 2015 to 2020
- The capacity for growth is limited by a slowing housing market, with most potential for growth in the Midlands and North
- Build costs are expected to increase by around £10,000 per unit to meet new energy efficiency standards, and by £2,200 per unit for BNG
- The supply of consented land coming to the market is expected to continue to remain lower than it was in 2018–2019
The market for greenfield development land has been at its strongest since the global financial crisis. Savills Land Index shows that land values increased nationally by 8.8% in 2021. In contrast, the growth over the previous five-year period was just 5.3%. UK average land values are just 4.5% below their 2008 peak, and in the South East region have now exceeded the earlier peak.
Our forecast for greenfield development land is for 4.4% growth over the five years to 2026, with most of that growth in the early stage of the forecast period
Emily Williams, Director, Residential Research
How long can this rate of growth continue? Recent increases have been supported by strong levels of house price growth and a shortage of land supply, with planning consents falling since 2019. Over the next five years changing environmental regulations and planning obligations will add significant costs to residential development. These are unlikely to be offset by house price growth continuing at the rate seen over the last 18 months, nor the supply of land remaining constrained. So our forecast for greenfield development land is for 4.4% growth over the five years to 2026, with most of that growth in the early stage of the forecast period.
As development land value is the result of a residual calculation, it is closely linked to the performance of the housing market. Savills current five-year forecast for UK house prices predicts growth of 13.1%, a much slower rate of growth than the 20.5% over the five years to November 2021. Already stretched affordability, combined with interest rate rises, will limit the capacity for growth in house prices and consequently land values. These limits are likely to be tighter in the South and East, where we are forecasting house price growth of 10.4%, than in the North and Midlands, where house price growth is forecasted to be between 15–19%.
While house prices are not expected to grow quickly, the cost of development is likely to climb over our forecast period.
The coronavirus pandemic and resulting supply chain issues has resulted in significant delays and cost increases for those trying to purchase building materials, which has been further exacerbated by the conflict in Ukraine. Materials availability was cited as the most significant constraint on development by 86% of respondents in the September 2021 HBF survey. This drove an 11.3% increase in construction costs during 2021, according to the BCIS Private Housing Construction Price Index (PHCPI).
New regulation is likely to increase these costs further. In June 2022, changes to Part L of the Building Regulations will increase the energy efficiency required of new homes. The regulation will require a 30% reduction in carbon emissions from new homes, among other measures. The cost of meeting this standard is estimated to be around £4,000 per unit according to the major housebuilders and DLUHC.
Furthermore, the Future Homes Standard will come into effect in 2025, which requires a 75–80% reduction in emissions compared to current standards. The cost of meeting this standard is projected by developers to add a further £3,000–£5,000 per unit in build costs. These accumulating additional costs, combined with limited house price growth is likely to put pressure on land values.
Delivery of affordable housing through section 106 currently accounts for 16% of all new build completions, a significant increase from the 2008 level of 4.4% This contributed to limiting land value growth over the last decade, but the expansion of affordable housing delivery through S106 or the replacement Infrastructure Levy is unlikely to continue over the next five years.
However, additional developer contributions will be added through the biodiversity net gain requirement introduced through the 2021 Environment Act. All planning applications will need to demonstrate that they have enhanced biodiversity with at least a 10% uplift on what the site currently provides, either on- or off-site. The cost of meeting the BNG obligation, including ongoing monitoring costs, is estimated to be around £2,000 per home, depending on the biodiversity currently on site and the difficulty of improving it. This requirement, which is expected to become mandatory for all residential developments in 2023, will further restrict potential for land value growth.
A key assumption underpinning our forecasts is that there is no significant change in the amount of consented land coming to the market. The large increase in planning consents following the introduction of the NPPF in 2012 helped to moderate land value growth. Between 2012 and 2019, the number of residential consents granted increased by 66.9% from 195,000 plots to 325,585 plots. Over the same period UK greenfield development land value growth was just 11%, and values remained 17% below their 2007 peak.
However, since the end of 2019, the number of consents granted nationally has been falling, dropping by 8% in 2020. This reduction in the flow of permissioned land has been a factor in the recent strong growth of development land values. According to the September 2021 HBF survey, 47% of respondents considered land availability to be a major constraint to development. Shortages have been most pronounced for immediate land with capacity for 50–150 homes, and our survey of Savills development land agents has shown that this has resulted in increased numbers of offers on sites and upward pressure on values.
It is unlikely that the supply of new planning permissions will rapidly return to 2019 levels. Planning is being disrupted in 21% of all local planning authorities by the need for residential development to demonstrate nutrient neutrality, with the potential that this will grow; 42 LPAs have only recently been added. In addition, ongoing uncertainty over national planning policy has resulted in several LPAs pausing or completely stopping their local plan process.
No increase in the level of consented land coming through planning has important consequences for our forecasts. As set out earlier, additional build costs and developer contributions will put downward pressure on values. But a lack of supply is likely to limit the impact of these factors. Developers will need to absorb new costs and tighten margins in order to be able to secure sites in what we expect to continue to be a very competitive market, leading to ongoing increases in land values.