Recovery underway in property development land in UK

The value of residential development land appears to be stabilising in most UK regions after a dramatic fall from the 2007 peak, according to the latest quarterly report.

The average value of both urban and Greenfield land rose by 2.1% during the second quarter of 2009, reflecting greater activity and confidence among developers, says the Knight Frank Residential Development Land Index.

It is regarded as good news after five months of strongly negative quarters. However, the supply of sites remains highly constrained, with owners dissuaded by sharply lower values

Also land values in London are continuing to fall partly because the drop in values began much later than elsewhere. But the report shows that in London the rate of decline is slowing.

'After five quarters in which land values almost halved, it appears that the market is now beginning to recover not just because of the stable pricing in many regions but also because housebuilders and developers are increasingly becoming acquisitive,' said Jon Neale, head of development research at Knight Frank.

'However, activity levels remain extremely low by historic standards. Landowners, in many cases, are unwilling to accept the prices put forward by buyers. Developers also find it very hard to obtain funding for purchase,' he warned.

Urban land values are now 40.2% lower than a year ago, while greenfield sites have depreciated by 29.1% over the same period. In London, average land values have also dropped by around 40% over the past year, although when measured from peak to trough the capital is among the most resilient of UK regions.

'Much of the revival in market fortunes is driven by the newly acquisitive mood among housebuilders and residential developers. Many such companies have indicated that they are looking to rebuild their land banks, although they will be highly selective in the sites they buy. Most are seeking smaller suburban and rural sites suitable for family housing,' explained Neale.

'As a consequence, there is not one uniform land market, unlike at the height of the boom where even marginal sites could achieve high values. Sites that suit housebuilders' new business plans can attract competitive bids and pricing in excess of average values. Many regeneration sites, particularly those with consent for high-density apartments, attract little interest,' he added.

'Furthermore, it remains to be seen whether the renewed sense of optimism in the wider housing market will be sustained. A rise in interest rates or a spike in unemployment could dampen this revival, prompting another change in land market dynamics.'