Average land prices are rising in the UK. Demand is continuing to grow, especially for readily developable, permissioned greenfield sites, in equity rich housing markets.
Many builders are once again taking on more challenging urban sites and strategic land, according to the latest analysis from Savills. Its report points out that banks, bolstered by renewed confidence in the housing market, are increasingly amenable to lending on longer term sites, while builders are increasingly willing to channel debt and equity into longer-term projects.
This is impacting on urban land values which grew by 2.2% in the third quarter of 2013 and 5.2% on an annual basis, against 1.3% growth in greenfield land values and 5% annually. The greatest increases were recorded in the South East at 3.2% and the West at 3.3%. The highest recorded growth was seen in Cardiff, Maidstone and Birmingham, with values moving off a low base.
Meanwhile, some builders are taking the opportunity to open up strategic sites from their existing land banks to add to their immediate pipeline. Others, such as Barratt, have stepped up land acquisition, citing over £1 billion approved for land purchases, almost double the budget for 2012. It has also transferred more plots from its strategic land bank for operational use.
Prospects for the industry are strong, with investment analysts upbeat on the house builder sector, anticipating higher returns to come. For example, HSBC cites ‘stellar land buying conditions’.
Going forward, the report says that land supply may be boosted by the Right to Contest scheme. This will allow challenges for the release of publicly owned land that is vacant or underused, even if it is currently in active use.
Meanwhile, the HCA has been tasked with reviewing all central Government land, with a view to a further tranche of public sector land release. Flexibility on public sector land terms has improved significantly with deferred payment terms common, improving the viability of many public sector sites.
Land buying activity has also been boosted by the flagship Help to Buy scheme which has recorded 15,410 reservations in its first six months. This has contributed to an increase in new home reservations, from 28 sales per outlet per annum in 2012, to 32 in 2013 to date among the largest listed builders.
In response, home builders are opening more sites, and residential construction is rising at its fastest rate since November 2003 according to the October Markit/CIPS PMI survey. Private housing starts now exceed 8,000 a month in England.
However, rapidly increasing output is putting some pressure on build costs. Material shortages have been cited by builders, but the biggest medium term risk is a shortage of skills. With graduate programmes, apprenticeships and long term training scaled back during the downturn, skills shortages are being felt as the industry scales up today. A mobile European workforce will help, but it will still take time for the industry to find the skills required to upscale, the report points out.
While the prospects for the large private and listed house builders is positive, small and medium sized enterprises are still suffering in a relatively debt constrained environment. Builders delivering less than 100 units a year accounted for almost a third of all housing output in the early nineties, and a quarter of output by the market peak. Hit hard by the downturn, by last year these SMEs were responsible for just 16% of total delivery. The reduced market participation of SMEs leaves open a space in which Housing Associations may be able to compete.
Residential development land in London continues to outperform the rest of the country, with values increasing by 13.2% in the year to September 2013. The report explains that London benefits from investment from overseas buyers, with high profile investment in the capital’s major regeneration sites.
‘Given the strength of the London market, developers in the capital are willing to take on longer term sites requiring complex planning and remediation. Such sites can offer the greatest payback, set against the higher risks involved,’ the report says.
‘The London new build market was supported throughout the downturn by equity rich buyers, particularly those from overseas. Today, a full pipeline of prime and fringe prime sites means secondary or lower priced London locations offer significant potential,’ it explains.
‘The strengthening domestic market, including demand from first time buyers, means there is much potential in the mainstream sector. It is this market segment where the supply shortage is most acute,’ it adds.