The pick-up in sales rates suggests activity is likely to return to the land market by the second half of the year
Summary
The residential development land market has changed completely in the last year, from a highly competitive market to a very steady and selective one, with a number of developers stating that they have no short-term requirement to add to their land pipeline. We expect activity to return by the summer if the more positive sales rates seen in January and February can be maintained throughout Q1 2023, but a full recovery will likely only come in 2024. However, other developers such as Housing Associations and student housing providers, who are not reliant on open market sales will see the quieter market presenting opportunity to build their pipelines with less competition.
Significant change in the land market
A year ago, we were anticipating that demand for residential development land would remain strong throughout 2023, with strong appetite for both immediate and strategic land. Strong sales rates in the two years following the end of the first lockdown boosted appetite for land, and all but one of the listed housebuilders reported an increased number of plots in their immediate land pipeline in 2021 compared with 2020.
In the first three quarters of 2022, land buying remained steady, although a reduction in the number of sites coming to market acted as a drag on transactional activity. However, the land pipelines of the major housebuilders have remained consistent over the last two years, as shown in the chart below, and are currently 15% larger than the 2015–2019 pre-pandemic average.
The rapid rise in the cost of borrowing as a consequence of the market turmoil prompted by September 2022’s mini-Budget, along with the end of Help to Buy, has brought about a reversal in the land market. With sales of new homes dropping sharply in Q4 2022, developers were under less pressure to replenish their land pipeline. Savills Q4 2022 agent survey showed a -49% net balance of opinion on the number of bids per site for greenfield land compared to the previous quarter, and net balance of opinion of -44% on the number of deals done. Unsurprisingly, this has also resulted in fewer landowners bringing sites to market. The net balance of Savills development agents reporting new sites launching onto the market fell to its lowest levels seen in over ten years, at -54%.
When will appetite for development land return?
The return to higher levels of activity in the land market is likely to depend on the pace of the recovery of transactions in the residential market. Early indicators from the start of 2023 present a mixed picture. In its latest Money and Credit statistical release, the Bank of England reported that mortgage approvals in December had fallen for the fourth month in a row to 35,600 new loans, the lowest level since May 2020.
Taylor Wimpey data for February is even more encouraging, at 0.66 per week. The average weekly reported sales rate for January 2023 is 0.50, compared to the long-term average of 0.73 between 2015 and 2021
Emily Williams, Director, Residential Research
Focusing on the new build market specifically, housebuilders already reporting half-year results for 2022/23 have seen a 25–30% fall in the number of forward sales compared to their 2021/22 full-year results. However, there are suggestions that the number of visitors to site, and sales per outlet, have picked up since the start of 2023.
Barratt reported a sales per outlet per week rate of 0.3 in Q4 2022, rising to 0.49 sales per outlet per week in January 2023. Redrow reported a similar uptick in activity; 0.38 sales per outlet per week for the second half of 2022, but 0.51 for the first five weeks of 2023. Taylor Wimpey data for February is even more encouraging, at 0.66 per week. The average weekly reported sales rate for January 2023 is 0.50, compared to the long-term average of 0.73 between 2015 and 2021.
Declining sales activity has fed through into reduced housebuilding starts. NHBC’s Residential Construction Statistics shows that starts on new plots in January 2023 were down -30% against January 2022 levels, and -27% against the January average for 2016–2022. However, this is an improvement from December, when starts were -35% lower than the long-term average.
If the January and February uptick in market activity is maintained, and sales rates settle at, at least 0.5–0.6 per outlet per week over the course of Q1 and into Q2 2023, we would expect the more positive starts data to continue, with developers to be increasingly confident in starting on new sites. In turn, this will likely result in more land market activity from Q2 2023, as the need to replenish land pipelines increases.
However, developers are likely to remain selective with their land buying, with several housebuilders reporting that they are switching their focus to longer-term strategic land opportunities. We expect the focus for immediate land to be in areas with the strongest market fundamentals and for the most straightforward sites. A full recovery in the market for immediate land will dependent on a significant improvement in transactions, which we anticipate to come in 2024, with projected cuts to the base rates improving the cost of borrowing for buyers.
Alternative sources of demand
Despite the current reticence of many developers to buy land, we do anticipate continuing demand from other sources. Many housing associations have significant requirements for sites, as they were unable to compete in the strong market of the last two years. According to the 2022 Inside Housing Survey of the 50 largest housing associations, the sector has the ambition to deliver 233,370 new homes by 2027, in line with the target reported in 2021.
However, housing associations have only secured the land to build 46% of this pipeline. As the chart below shows, there is a need for land with capacity for around 13,000 homes that can be delivered by 2024, and land with capacity for at least 85,000 homes to be delivered between 2024 and 2027. There is still grant available under the 2021–2026 Affordable Homes Program which could support land-buying activity.
Equally, there is currently strong appetite for sites in city centres or close to University campuses from providers of Purpose Built Student Accommodation (PBSA). With student applicant numbers in the 2023 cycle 6% above their pre-pandemic level, and shrinking availability in the private rental sector, there is a compelling need for more PBSA across the UK. Demand for new supply is likely to be strongest in cities like Newcastle, Leeds and Nottingham, where private rental supply has dropped by over 30% compared to the 2017–19 average, but well-positioned sites close to university campuses or city centres are in demand across the UK.