House builders face rising competition for land in the UK

Hundreds of thousands of new homes need to be built in the UK every year but a new research report suggests that house builders are facing rising competition for land.

Reduced competition in the residential development land market and increasing supply of consented land had created benign conditions for the major house builders over recent years, according to international real estate adviser Savills.

But demand is growing and market conditions could change, the firm’s analysis says. The report explains that since the global financial crisis the sector has focused on controlled growth, in large part replacing land built out with permissioned land from their existing strategic pipelines.

The number of consents granted in England rose by 16% in the year to the end of June 2017 compared to the previous year, for now supporting the benign market conditions and allowing major housebuilders to buy land at or above their hurdle rates.

As a result, greenfield land values have remained relatively flat, ticking up by a marginal 0.1% in the final quarter of 2017 and annual growth totalled 1.7%, in line with the 1.8% recorded in 2016.

Over the past five years, average greenfield land values across the UK have risen by a total of 21.2%, significantly below new build house price growth while the number of house builders registered with the National Housebuilding Council stands at less than half, 46%, the average in the 12 years pre credit crunch decade.

‘For now, land market conditions remain benign for major housebuilders, but they face increasing competition from other players, both for strategic and shorter term land, ready to build out,’ said Emily Williams, senior residential researcher at Savills.

‘The Government’s desire to see 300,000 new homes a year built in England, a 38% rise from where we are now, will obviously boost demand for land. To maintain benign conditions, therefore, we need to see much more land being brought forward, with more planning consents in the areas where demand is highest,’ she pointed out.

In geographical terms, the fastest growing markets are in the north of England and Scotland, where greenfield land values rose 4.2% and 2.7% respectively in 2017 and this is underpinned by strengthening housing demand in these relatively affordable markets.

Savills five year forecasts anticipate house price growth of 17% to 18% in these two regions, ahead of the 14% average for the UK and more than double the 7% uplift forecast for London.

Homes England investment has been supporting developments across the country, with investments in sites in the north has really helped boost confidence, according to Savills land agents.

Strategic land is now a focus for a range of developers and investors. In the past year, Savills advised on the sale of several strategic land portfolios totalling 60,000 residential plots and the major housebuilders are now buying more of this longer term land. Last year they bought 9% more land through Savills than in 2015, in a combination of consented and strategic land.

Medium sized house builders are increasing their activity given more attractive operational margins and improved availability of finance, buying 10% more plots through Savills last year than in 2016 and 54% more than in 2015, albeit they are coming from a low base.

Housing associations have also become more competitive in the market and probably represent the biggest potential additional source of demand for residential development land, Savills says.

This is contributing to rising urban land values. Across the UK as a whole, urban development land values rose 0.5% in the final quarter of 2017 and 4% across the whole year, more than double the growth in greenfield land values.

Manchester was the standout performer. Urban land values in the city rose by 24% in 2017, well ahead of house price growth of 8.6% in the year to October 2017, and over double the 4.2% UK average.

At the same time, London developers have been moving beyond the capital, supporting or pushing up land values in markets such as Woking, Guildford and Chelmsford, often building flats for London commuters seeking more affordable accommodation.