Land values rising higher than house prices

“Invest in land, they’re not making it anymore,” Mark Twain famously said. While property prices tend to suffer in times of turmoil, the earth they are built on remains fertile ground for investors.

While property prices have stagnated, dipping 0.2% from last quarter, residential land values have risen by as much as 15% in some UK cities.

“House prices have stagnated over the past three months,” said Martin Ellis, Halifax housing economist, said. “Overall, prices in the three months to April were marginally lower than in the preceding three months; the first quarterly decline since November 2012. The annual rate of growth remained at 3.8% in April, the lowest rate since May 2013.

“Housing demand appears to have been curbed in recent months due to the deterioration in housing affordability caused by a sustained period of rapid house price growth during 2014-16. Signs of a decline in the pace of job creation, and the beginnings of a squeeze on households’ finances as a result of increasing inflation, may also be constraining the demand for homes.”

An acute shortage of homes, however, is expected to underpin prices, and keep housebuilders hunting for land. As prices stagnate in London, developers are increasingly looking beyond the capital. Birmingham, Manchester and Glasgow have seen the highest residential land price growth as Build to Rent, urban regeneration and infrastructure improvement initiatives boost demand.

Residential land values rose by 15% year on year in these cities, compared to house price growth of between 6.3 and 9.4%, according to the Savills residential development land index High demand means that previously overlooked sites are being considered by developers.

These three cities all have significant and rising housing shortfalls which is underpinning competition for land. Detailed analysis by Savills over the past 18 months suggests that Birmingham needs 89,000 new homes by 2031, while Glasgow’s shortfall could reach 11,000 by 2021, Manchester 10,000.

Across the UK as a whole, urban land values rose by an average of 1.8% in the first quarter of 2017 and 4.4% year on year. Greenfield land values grew by just 0.4% and 1.3% in the same periods.

Activity levels and pricing in the central London residential land market reflects continued weakening of values in the new homes market, particularly in the fully supplied £1,000 per square foot prime market.

Falling starts in prime central London have reduced demand for land in zone 1, but there are signs that land values are finding their level. Having fallen -8.9% in the six months to the end of September 2016, prices stabilised (+0.1%) over the six months to the end of March 2017.

The major stamp duty overhaul of December 2014 caused prime market house price falls and halted price growth in the central London land market. Prices are now -10.5% down from that point, but still 18.7% above their level 10 years ago.

By contrast, a chronic shortage of new homes at a lower price point is translating into strong demand for land in zones 2-6. Savills estimates that the undersupply of new homes in the sub £700 per square foot London market will likely increase by around 28,500 a year for the next five years at least.

Crucially, funders are ready to support developments below £1,000 per square foot and the Build to Rent sector is also active below this level.

Lucy Greenwood, Savills residential development research analyst said, “Key regional cities are outperforming other locations meaning the pattern of price growth across the UK’s residential market is not dissimilar to the house price growth map.

“Higher end housebuilders, such as Crest Nicholson and Berkeley Homes, have been seeking development opportunities beyond the South East. There is still interest for sites in the capital’s central zone, however, from international bidders able to exploit the currency advantage and we are also seeing international investors partnering with local developers, where land owners are ready to take a hit on the price they’d have achieved a year ago.

“Competition for land in zones 2 to 6 is coming from all types of developers from UK housebuilders to niche developers.”

Central London office land values have continued to soften over recent months, down -7.6% year on year but just -1.7% in the six months to the end of March 2017. Tenant demand is holding up well, though the extent to which Brexit might heighten occupational risk remains to be seen.

Prime yields in the City and West End remain stable, but build costs continue to increase, a combination which puts downward pressure on land values.

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