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Development land in central London rises faster than house prices

By contrast, residential land prices remain suppressed in other locations, including Greater London.
Central London residential locations have seen values rise by 4% over the last 6 months, and a total of 17% over the past year compared to 2% mainstream house price growth.

‘Although central London land price growth has exceeded house price growth values remain 10 per cent below peak, suggesting scope for further growth,’ said Yolande Barnes, head of Savills residential research.

‘Finite land supply, particularly in prime, central locations, coupled with continued demand for high-end product for overseas buyers, has buoyed values and this growth in residential land values arguably strengthens the case for the conversion to residential of sites earmarked for office or hotel use,’ she explained.

There is a weaker outlook for land in outer London and regions. Fringe central areas, exposed to more challenging domestic markets, even in the capital, have seen little or no growth.  Beyond London, growth of green field land has seen a significant slowdown.
Greenfield land values have risen just 3.2% in the last year compared to annual growth at 15.1% to the end of September 2010, and a marginal 0.2% in the third quarter.
Similarly, annual urban land value growth has slowed to just 2.3% year on year from 13.3% year ago.  Greenfield values remain 45% below peak, while urban land is 51% down.

‘UK land values remain 45% below peak, with little scope for further growth while development viability is so fragile in many locations and particularly as UK mainstream house prices are still more than 10% below their peak,’ said Barnes.

Savills says that slowing growth is the product of a challenging housing market and poor sentiment generally. The land market polarised in the wake of the downturn, and this is a trend we expect to continue. Developers and house builders have focused on the easily developable sites in areas of strong demand, while large urban sites are struggling to trade and we see no prospect of change.
‘The emphasis on viability over need in the emerging policy environment, the National Planning Policy Framework (NPPF) in particular, will compound this trend,’ explained Barnes.
‘Without sufficient incentives, and with the scaling back of public regeneration funding, the most challenging sites will be further marginalised and are likely to remain underwater for the foreseeable future,’ she added.

Uncertainty regarding future policy is adding to downward pressures on the value of non-permissioned sites. Concern regarding the emerging use of the Community Infrastructure Levy is playing second fiddle to debate surrounding the NPPF but could have a significant impact on values. The levy, charged at blanket rates, cannot be negotiated once set by local authorities; it is therefore imperative that schedules are tested with a robust viability assessment.

‘The reality of the market is that developers need quick returns on capital and we anticipate that this will continue to drive a focus on small sites. This can only mean that housing output will continue to undershoot the number of new households forming each year and we forecast that there will be a shortfall 1.4 million homes by 2022,’ concluded Barnes.