Publication

Market in Minutes: Residential Development Land – Q1 2022

Sustained strength in land values



Land value growth remained strong in the first quarter of 2022 despite mounting build cost pressures. In Q1 2022, UK greenfield and urban values increased by 1.4% and 1.3% respectively, taking annual growth to 9.3% and 7.2%. This is in comparison to annual growth of 0.2% and 1.2% for UK greenfield and urban land in the year to Q1 2021.

High levels of demand and constrained land supply have maintained land values as parties are still willing to bid competitively for sites in order to secure their pipelines. The strength in the housing market has also supported regional land values. In the year to March 2022, UK house prices increased by 14.3% according to Nationwide, representing the highest growth since 2004. The second hand residential market continues to suffer from a shortage of stock for sale, supporting demand for new homes.

Build cost inflation continues to serve as a downward pressure on land values with build costs rising by 6.5% in the year to Q1 2022 according to BCIS, driven by limited availability of materials and energy cost inflation. The availability of materials was cited as a major development constraint by 88% of respondents in the Q4 2021 HBF survey.

However, any impact of rising build costs on land values is still relatively limited, offset by ongoing house price growth and the imbalance between supply and demand.

There continues to be a limited supply of land coming through the planning system which has driven intense competition for sites. At a national level, 16% fewer homes were granted consent in the 12 months to Q4 2021 compared to 2019. 

The shortage of stock is further compounded by the 42 additional local authorities identified by Natural England as having to demonstrate nutrient neutrality on sites taking the total to 74 local authorities affected at present. If these supply constraints continue, there may be greater capacity for further growth in land values in these areas.

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Exceptional appetite for land

Demand for land remains exceptionally strong with competition for sites from a diverse range of players. The number of bids per site and value of bids continue at similar levels to Q1 2022. Deferred payments are coming under pressure as parties seek to be more competitive through payment terms in addition to tightening margins.

Major housebuilders continue to be the most competitive in the land market. Many still have surplus money to spend and require land to plug gaps in their immediate pipelines given that many sites are already significantly forward sold for FY 2022.

Housing associations, supported by grant funding, are increasingly active in the regional land market, bidding on equal and competitive terms to the major housebuilders in some cases. There is also a growing presence of private and institutional investment seeking single family investment opportunities, supporting private housebuilders, many of which have strong growth aspirations. Private housebuilders with financial power tend to have greater flexibility in their bidding power and as a result are being competitive across many regional markets.

Smaller and medium sized players are more constrained by cost inflation, leading many to adopt a more cautious approach focusing on core locations.

Demand from industrial and logistics developers is applying to more locations across the country, putting even more pressure on constrained residential land supply

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London land values remain stable

Land values in London continue to face downward pressure from increasing build costs and lower affordable housing values, particularly in Outer London. In the last six months there has been minimal change in residential land values in London. Central and Outer London residential land values fell by 0.1% and 0.4% respectively in the six months to March 2022, taking annual change to 0% in Central London and -1.2% in Outer London. As seen in the regional markets, the disconnect between supply and demand for all types of sites has stabilised land values with bidders squeezing margins in order to remain competitive.

Landowner expectations remain high. As residential development in London faces numerous planning and viability challenges, many landowners are either not bringing sites forward or are considering alternative deal structures and competing commercial uses.

By contrast, London office land values have increased considerably over the last six months, supported by a range of players chasing a scarcity of well-located stock and positive rental growth expectations across many markets in Central London. Over the last six months, Central and Outer London office land values increased by 7.6% and 4.0% respectively, recovering fully from a period of falls during Covid-19.

Outlook

Although the current land market remains buoyant, capacity for further growth is limited. Over the next five years, we anticipate slowing growth in land values as current supply demand dynamics give way to build cost pressures, environmental requirements including Biodiversity Net Gain, Nutrient Neutrality solutions and the Future Homes Standard, and decelerating house price growth. The current cost of living crisis with rising energy price inflation will also have a significant impact on build costs, adding to downward pressure on values.

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