“The land is the only thing in the world worth working for, worth fighting for, worth dying for, because it’s the only thing that lasts,” said Gerald O’Hara in the opening lines of Margaret Mitchell’s Gone With The Wind.
It seems that the market agrees. After a quiet summer, land buyers have steadied their nerves and regained their appetite. However, the mood has been altered. According to a recent Savills report, there remains variation across the country and activity in the land market is concentrated in stronger markets.
According to its survey of Savills agents, sentiment for both green field and urban sites was more positive in Q4 than in Q3, when there was much caution in the land market due to uncertainty after the Brexit vote. The number of bids per site was, on balance, more positive than the negative result in the previous quarter.
However, larger housebuilders are continuing to bid selectively. In general, land buyers are taking less risk, focussing on oven-ready sites in areas of stronger home buyer and renter demand, close to established residential areas or good infrastructure.
Generally, there is less demand for sites in more rural or economically weaker markets and for those needing remediation.
Although activity in the land market picked up after a dip immediately following the referendum, caution in the second half of 2016 means that transactions of development land have been lower than in the previous year. The appetite for land remains robust but the more selective nature of housebuilders means that deals are taking longer to achieve.
Urban land values have increased more strongly than values for greenfield land over the last quarter, picking up from the slow or negative growth in Q3 2016 following the Brexit vote. On a UK wide basis urban development land values increased by 1.2% in the last quarter of 2016 bringing annual growth to 3.6% while green field development land values increased by 0.5% in Q4 2016 with annual growth of 1.7%.
Growth in regional cities including Birmingham, Manchester and Glasgow contributed to the demand for urban land, pushing up values. In Birmingham, where land values increased in Q3 despite the Brexit vote, demand for sites is strong from PRS and institutional funds.
In Manchester it is suburban brown field sites, just outside the very centre of the city, that are drawing strong demand as developers look beyond the city apartment market for alternative opportunities. Glasgow has a lack of supply of sites in prime locations which continues to drive land values in these markets.
The publicly listed housebuilders (PLCs) are becoming more active in the land market again having been the most cautious about purchasing land in the summer and early autumn.
The largest PLCs; Persimmon, Taylor Wimpey and Barratt, have all recently reported increases in completions (outside London) with higher profits and an awareness of the uncertain political and economic backdrop. They, along with the other PLCs continue to target increased output over the coming years.
The greater supply of consented land and the need to just replenish their pipeline of land means that the PLCs can be selective about the sites they buy. Oven-ready, permissioned land parcels of c.100-150 homes are generally preferred by the PLCs at the moment. Greater due diligence has been required on sites, deferred payment terms have become more common and hurdle rates have been raised to reduce risk.
Regional housebuilders or larger private housebuilders have been able to take advantage of the more selective land buying by the PLC housebuilders. Being privately financed and having more flexibility, they have been able to continue to make bids on sites, paying upfront in many cases.
Regional housebuilders are expanding and need the land to continue to do so. The top 11-50 largest builders are the fastest growing group, increasing the number of completions achieved by 31% in the year to October 2016 according to the NHBC.
SMEs generally operate on smaller sites (less than 25 homes) than those wanted by the larger housebuilders. They have been able to continue their activity in the land buying market where they have access to finance, which continues to be a constraint.
There have been more SMEs entering the market in places such as Devon and Cornwall and in some cases are looking to work on larger sites of 20 or more units.
Housing Associations have increased their land buying activity. Four times as much land was bought by Housing Associations in 2016 through Savills than in 2015 and L&Q, for example, owned three times as much permissioned land in 2016 than in 2015.
In areas where there is less intense competition for land, more land owners are engaging with joint venture agreements with developers, to generate higher land value over a longer period. Build licences are often used.
In a similar way to deferred payments, it means that housebuilders don’t have to foot the cost of the land upfront. These areas of less intense competition provide more opportunities for a wider range of developers to enter the market.