The latest Residential Development Land Index from Knight Frank shows that land prices have been rising in central London for most of the last year, as competition grows more intense for sites in prime locations. The annual rise in land values is now around 9%.
Average land values have risen 1.8% in the last 12 months, up from a 0.2% rise in the first quarter of the year. The modest rise in values in the regions is only the second consecutive quarterly increase in values since the end of 2011, and comes amid a pick up in activity engendered by stronger demand for housing, the index report says.
‘The combination of the Funding for Lending scheme, which has pushed down mortgage rates, and the Help to Buy equity loan, which has led to the reservation of around 7,000 new build homes, have helped boost market confidence more broadly,’ said Gráinne Gilmore, head of UK Residential Research at Knight Frank.
‘Certainly the underpinning of demand in the market will give house builders the opportunity to achieve faster sales turnover, cutting their cost of capital and leaving room for land prices to grow,’ she explained.
‘There is also anecdotal evidence that construction activity is starting to rise. This will be welcomed by home buyers and policymakers alike. Official figures on house building have yet to be published, but brick and blockwork manufacturers are stepping up activity to keep up with demand, and the official overall construction data from the Office of National Statistics was better than expected in the second quarter,’ she added.
This pick up in activity has also been reflected in trading updates from house builders, with Persimmon, Galliford Try, Taylor Wimpey and Redrow reporting better than expected results for the first half of the year.
Policymakers have emphasized that Help to Buy is designed to help encourage development but some commentators have expressed disappointment that house building levels have not yet improved.
‘Given that the scheme has only been in place for around four months, it is too early to expect a rise in this measure. But anecdotal evidence, including reports of brick and blockwork shortages, suggest that construction activity is on the rise, and this was confirmed in the rise in construction output seen in July’s GDP figures,’ Gilmore said.
She also pointed out that the increased demand for housing also suggests that house builders’ cost of capital will be curbed, given the faster sales turnover they can expect, allowing some room for land prices to rise.
Also Knight Frank’s latest house price sentiment index shows that households across the UK are feeling much more confident that the value of their home is starting to rise. ‘The growing optimism will help encourage movement in the market, aided by the arrival of more first time buyers thanks to Help to Buy, which will go some way to unblocking the housing chain. As a result of this, combined with other market factors such as low interest rates, last month Knight Frank revised its forecasts for UK house prices,’ she explained.
But she also pointed out that the planning system remains a form of barrier to development and as the National Planning Policy Framework (NPPF) beds in, a time consuming trend for ‘planning by appeal’ has emerged.
Developers and house builders also remain concerned about the Community Infrastructure Levy (CIL). Policymakers may need to be aware that this additional charge for developers could act as a partial brake on development activity,’ she added.
The fact that London is outperforming the rest of the UK has attracted attention from developers and house builders. ‘Add to this the expected undersupply of housing in the capital, and the large scale regeneration and infrastructure projects which are underway, Crossrail for example, and the reasons underpinning the rise in the value of residential land in the capital become clear,’ concluded Gilmore.
