The company now forecasts that serviced land values will return to their 2007 peak level by 2016, but bulk land and regeneration sites will be an altogether different story.
Lending and investment remains suppressed and the forthcoming Basel III banking regulations could further constrict debt funding, Savills research believes. As such, house builder demand will continue to focus on smaller sites that can be funded from their own balance sheets. This will lead to a short to medium term focus on small, serviced sites that can be relatively easily delivered and converted into cash flow.
Confidence in London’s housing market, coupled with the underlying housing scarcity, is creating land value and means that house builders and developers continue to focus attention in the capital.
Central London residential land values are now just 7% below their 2007 peak having risen by 3.9% over the past six months and 7.8% in the past year, according to the company’s development land indices. This compares to average growth outside London of just 0.5% and 1.6% over the same two periods.
‘Importantly, average residential land values in London are now double those for office or hotel use. The National Planning Policy Framework (NPPF) guidance supports the conversion of commercial sites where housing need can be identified. The fact that commercial land is worth only half of its former high makes the case for office to residential conversion even more compelling,’ said Yolande Barnes, head of Savills residential research.
Barnes believes that the London Mayor’s target of 32,250 new homes per year until 2021 is ambitious by any measure. ‘In 2011 just 17,640, of dwellings were completed so the site value differential will be instrumental in bringing forward further viable land. It remains to be seen which local authorities will resist development ambition in an attempt to retain the employment generating title of land and its associated commercial use classes,’ she explained.
Under the NPPF, local authorities must earmark a five year residential land supply at +5% for those with a good track record of allocating land for housing and +20% for those which have persistently under delivered.
‘While in theory this is good news for owners of bulk land, delivery will only be possible in markets that have the strength to absorb new supply there is a big difference between planning allocation and real world deliverability,’ Barnes pointed out.
‘In strong markets we are beginning to see an unprecedented opportunity for new investors or land developers to transform bulk land into the kind of serviced plots for which the market has appetite, and which house builders and developers have the means to fund,’ she added.
Barnes concludes that the strength of the market today has much to do with the quality of developers’ balance sheets. ‘In the short to mid term this means that the smaller sites that they can self fund will continue to dominate. Many large scale sites, particularly in weaker markets, require such significant upfront investment that it is difficult to envisage when house building, particularly for owner occupation, will become viable again,’ she said.
‘This has important implications for the effectiveness of the new planning regime. The new National Planning Policy Framework has been designed to increase the delivery of sustainable development, particularly housing. In reality, it is land price and development viability that will determine the outcome on housing numbers. Any industry that is intent on increasing output will need to use the new framework to deliver a sufficient supply of the main raw material of production, that is viable, consented land,’ she added.
