Urban land values increased by 1.5% in the fourth quarter of 2015, up from 0.2% in the third quarter, taking annual growth to 7.1% while greenfield land values increased by 0.7%, up from a fall of 0.1% in the previous quarter and year on year by 2%.
The latest residential development report from real estate firm Savills says that the increase in urban land values reflects a rise in demand due to an improved economy, stronger markets and increased viability.
Additionally, the report says that urban values have greater scope to increase than greenfield values because they are further below their 2007 peak, an average of 42% below peak compared to 21% below peak for greenfield land.
In general, development land values are linked to the supply of land and the demand from developers. The largely stable values of development land are in part due to the increase in supply of new permissions with the annualised number of planning permissions in Great Britain up by 21% in between 2010 and 2015.
And it adds that a lack of new players in the market and 46% fewer house builders registered with NHBC in 2015 compared to 2005 has reduced competition for sites.
Savills agents report that there is increasing demand for land in urban locations close to good transport links on which, more commonly, apartments are built such as Birmingham and Coventry in the Midlands.
This is reflected in the shift in the type of new homes built. Between 2008 and 2014 houses accounted for an increasing proportion of new build homes, however, since March 2014 this trend has been reversed and we are seeing flats accounting for higher proportions of delivery at 35% in the year to March 2015 up from 29% the previous year according to data from the Department of Communities and Local Government.
The report explains that the change in type of home being built reflects the improving viability and ability to finance denser sites. Immediately following the economic downturn, housebuilders focused more on developing houses because they require less upfront capital, can be built one at a time and sold as they are finished.
However, now that market strength is picking up, there is greater appetite to take on the risk required to build a block of apartments where, apart from off-plan sales, flats are sold only when the whole block is complete.
But not everywhere is seeing growth. For example, sentiment for development land in Aberdeen has become less positive and has impacted negatively on the overall Scottish greenfield development land index which was down 0.5% in the final quarter of 2015.
Indeed, land values in Aberdeen have fallen 2.9% in the year to quarter four of 2015 for greenfield land and this is due to the continued low oil price and uncertainty over the future of the industry.
However, in the rest of Scotland, sentiment for development land remains positive and land values have not changed in the last three months of 2015 or seen small increases in value in the case of Edinburgh. The recently announced extension of Help to Buy (Scotland) to 2019 is expected to support the continuation of this positive sentiment.
According to Savills, one of the biggest factors affecting land value is the amount of affordable housing that the local planning authority will require the developer to deliver alongside open market homes. There is currently little clarity on how the Starter Homes policy will play out at a local level. As a result the appraisal of land value is increasingly challenging.
The report also points out that Government policy over the last two parliaments has been directed toward the release of public land for house building in order to help alleviate the undersupply of new homes and generate capital receipts.
The Ministry of Defence, as one of the UK largest landowners, has been particularly active, with sites including RAF Wyton and RAF Waterbeach. The release of the public estate will increase the supply of development land; the location and time of release will be the determining factor on how it affects the land value.
Whilst in under supplied areas the new land can be absorbed into the market with little impact, if not carefully managed a large supply of land in a well-supplied market will put downwards pressure on land values, the report suggests.
Housebuilders are commonly cited as owning land with planning permission and not building on it quickly enough. However, the Savills analysis of site ownership by planning status highlights the prevalence of other market players.
These operators, who are bringing land through the planning system, are in many cases servicing the land before selling it on to house builders. While house builders own the majority of sites at 83% of homes with full planning permission granted, they only own 34% of the land currently in the planning pipeline.
The biggest uncertainty for those operating in the development land market is the cost implications of affordable provision and Starter Homes, which is yet to be detailed by the Government, the report explains.
‘Until we know this the change in value of development land is difficult to predict. However, the urban land market looks to continue to see the biggest increase in land values, especially in locations where the local economy is improving and employment is growing,’ it concludes.
