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Residential development land growth in England and Wales moderates

According to the latest figures from Knight Frank the annual increase in the third quarter of the year was 3.7%, down from the 5.6% annual rate of growth in the second quarter of 2014.

The firm says that while the appetite for the best sites is still strong, rising material costs and a shortage of skilled labour is starting to weigh on prices.

Prices in London are still advancing faster than the rest of the country, the average annual rate of growth for sites in prime central London slowed from 18.9% to 18.7% in the third quarter.

‘While house price growth is starting to slow, there is still room for more growth in development land, especially in commuter zones around London and other key cities,’ said Grainne Gilmore, head of UK residential research at Knight Frank.

‘However the disparity between the best sites and those that are compromised may become more entrenched and competition for good development sites remains strong throughout the country. But there is no doubt that developers are becoming more selective about the sites they consider,’ she explained, adding that this has been reflected by a slight slowing in sales volumes in recent months.

Mirroring the trend in house prices, there has been a ripple effect from central London, with sites in key commuter towns close to the capital proving the most alluring for developers.

‘While planning remains a thorny issue for developers and house builders, these concerns have been somewhat overshadowed of late by the rising cost of construction and the difficulties in sourcing workers with suitable skills to build out sites,’ said Gilmore.

‘Shortages of material have contributed to rising prices, and this, a well as the shortage of labour, can be dated back to the financial crisis, when construction activity all but ground to a halt,’ she pointed out.

‘The very moderate growth in house building in the years following the zenith of the financial crisis were not enough to power up the industry for the sharp rise in activity seen over the last 18 to 24 months. So the delivery of materials and a workforce with the necessary skills is now proving problematic,’ she added.

The report also shows that there has been a sharp rise in the number of respondents to the RICS survey saying that labour shortages and rising material costs are limiting levels of construction activity. These factors are now starting to weigh on development land prices, with developers being cautious about future material and labour costs in such an environment.

‘While the rising cost of materials will directly impact margins, difficulties in accessing suitable labour could add to the length of time that elapses before units can be sold, which will also, in turn, push up costs,’ said Gilmore.
‘As a result, buyers are applying downward pressure to offers for development land. Some sites across the country have fallen in value marginally over the last three months,’ she added.
 
The data shows that in London, development land prices are continuing to rise strongly on an annual basis, but there has been a slowing in the pace of growth, from 14.2% in the 12 months to June to 13.2% in the year to September in Greater London. Prime central London values have also slowed slightly.

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