There is caution in the land market due to uncertainty after the EU referendum across much of the UK leading to falls in land value in some areas, according to new research from Savills.
Land values have stagnated or fallen over the last three months according to Savills’ development land index. Only the UK urban development land index saw a slight increase in value.
“Whilst in many markets prices have remained static, overall our UK green field development land index has fallen 0.4% in Q3 2016 reflecting increased caution by land buyers,” Savills said. “Urban development land values have increased by just 0.1% in Q3 2016.”
Since the EU referendum, sentiment in the development land market is more neutral for both green field and urban land. According to Savills, land buyers are prepared to take less risk in buying sites and in some cases hurdle rates have been increased.
Most areas of the country have seen no changes to land values since June with low levels of transactions being part of the picture. “The small shift in the UK-wide index results reflects price falls seen in parts of the country including Kent, Cornwall and Scotland,” Savills said.
In Kent, there is limited competition for lower value sites at present, although the better areas continue to perform. This is because the county is dominated by major housebuilders who hesitated post Brexit.
Land buying activity in Cornwall and Scotland has been maintained on the whole. But those purchasing land require higher margins which is reducing the value they are prepared to pay for sites.
Land buyers caution means that there is a focus towards lower risk sites. There is continued activity and prices are holding up, or even slightly increasing, for the best sites. The best sites tend to be those in economically strong markets where house price growth has not peaked.
Demand has been maintained for green field sites in locations west and north of London including around Milton Keynes, Newbury and Reading. Markets such as Cheltenham have also continued to see sales of smaller sites. In and around Bristol, both major and regional housebuilders are competing for land where supply levels have not been keeping up with the growth of the city.
City centre sites in Birmingham have seen continued demand as underlying regeneration stimulus such as HS2 and the demand for Build-to-Rent have supported land value growth. Investors who had previously focused on London are looking for opportunities beyond the capital and are supporting the demand for sites in the city.
Housebuilders are watching sales rates on new build developments closely to understand the current market, alongside other market indicators.
Overall, caution has meant that the number of bids for sites has been reduced. The survey of Savills’ agents shows that a net balance of 10-17% of agents noted a decrease in the number of bids per site compared to last quarter. There are, however, some areas where the number of bids has been maintained.
Amongst markets showing recent strength, bid levels have been relatively strong in the markets in and around Birmingham, consistent with the land value growth seen in the city.
“Within the capital we have seen the strongest demand and most transactions in outer London in markets where new build sales values are £450-850 per sq ft.,” said Savills.
Values for residential development land in central London have fallen by an average of 8.9% in the last six months (10.2% falls over the year) predominantly due to a decrease
in house prices. Central areas of Mayfair and Knightsbridge have felt the greatest impact; our prime Central London house price index shows that second hand house prices have fallen by 10.6% since the 2014 peak, in large part due to stamp duty changes.
Alongside this there are increased challenges in raising debt finance. Build costs have continued to increase and gross development value has reduced due to increases in yields, reflecting perceptions of risk amongst investors.
“With so much uncertainty remaining over the impact of Brexit, land market conditions have yet to settle,” Savills said. “However, by the end of the year, after the Autumn marketing season, the state of the land market and its impact on housing delivery volumes will become clearer.”