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Price of residential development land in UK rises for third quarter in a row, latest index shows

The latest report from Knight Frank shows that Urban land values rose 2.1% and are now 6.1% higher than the low point they reached in the first quarter of 2009. Greenfield land values rose 4.0% and are now 8.0% higher than the low point they reached in the same period.
But despite strong recent growth, urban land values are still 51% below the peak levels reached in the fourth quarter of 2007 and Greenfield values are 39% below their peak, the report points out.
The market revival is being led by London and in particular by super-prime locations in the city such as Kensington and Chelsea and Westminster, where land values rose 7% in the fourth quarter of 2009.
Liam Bailey, Knight Frank’s head of residential research said that the strong price performance delivered by development land reflects the recovery in the wider residential market during 2009. With UK house prices recovering by 6% across the year and sales volumes picking up by 75% year-on-year in December, development economics have improved and developers and house-builders have been looking to raise new-build starts.
‘Starts rose over 2009 and by the end of 2009 were running at 25% above the level achieved in the same period a year earlier. However, while the development sector has become more active, the supply of land in the market is still painfully thin,’ explained Bailey.
  ‘Even land that is coming to the market tends to have too high a price placed on it by ambitious vendors. So even though land prices have risen it is very easy for sellers to price themselves out of the market,’ he added.
Outside of London and the south east the market is still more subdued. Purchaser’s ability to make offers with a lump sum up front payments is still very much restricted and it is only a small handful of cash rich purchasers looking at distressed situations who have been able to do this, the report says.
The outlook for 2010 is for further growth in development land pricing, although only single digit growth for the year. ‘Even this will only take land values part way back to the peak levels they hit in late 2007. The incentive for many landowners to sit out the recovery phase in land pricing will be great, and to my mind will keep land volumes low into the medium term,’ said Bailey.
He added that potential new planning legislation following the election could also add to the hiatus in the land market, further constraining supply from landowners and putting additional upwards pressure on development land.
In a separate report Knight Frank says that the value of English farmland has increased 164% over the past ten years from £1,944 an acre to £5,123 an acre. This is especially impressive, the report says, as the growth for prime residential property in Central London was a mere 113%, whilst the FTSE 100 share index ended the decade 22% down. ‘As a capital asset things have turned out very well for farmland and perhaps much better than anyone would have anticipated,’ it says.
But farmland values are not exempt from threats such as the uncertainty of political change and the end of the current Single Payment Scheme in 2012. ‘Land ownership may, for example, become less enticing if there are changes to Agricultural Property Relief legislation that, in many circumstances, currently provides 100% relief from inheritance tax on farmland and residential property that is integral to the farming business,’ it adds.
Although farmland values in excess of £10,000 an acre are certainly not inconceivable, caution should be used when estimating the future value of individual blocks of farmland. Prices are likely to become more regionalised and not necessarily in line with the land’s agricultural productivity value as demand from other uses, such as renewable energy, increases, it concludes.