This competition is highly localised and focused on small, serviced sites which has led to strong recovery occurring in distinct segments and localised pockets of the market.
Central London land values are particularly notable in having achieved double digit growth over the past six months. This land value growth is a full, nine percentage points ahead of the growth seen in the value of underlying prime residential property, according to the Savills development land index.
Residential land at a premium
Central London land values rose by 12.5 per cent in the last two quarters, bringing the average value of land for residential use almost double that for hotel or office uses. Anecdotal evidence suggests these averages may understate the prices being achieved for the rarest residential sites and there are reports that some are now achieving prices approaching peak values last seen in 2007.
Office land values in central London increased by 11.6 per cent and hotel values grew by just 5.7 per cent in the six months to March 2011 but this bounce in values fails to dent the supremacy of residential as the most viable land use in all the central areas studied - even the City of London.
This has important implications for commercial developers who are increasingly looking to include residential uses on a scheme to make it viable. Savills anticipates that mixed use will increasingly become the norm for new London developments.
In addition, with the proposed changes to use class legislation making B1 (office) use and possibly other commercial use classes instantly convertible to residential use, it will become increasingly difficult for commercial developers to compete with residential in London where burgeoning demand and very limited supply in central areas is likely to continue boosting residential values and development viability.
Northern stagnation while South grows
Outside London, the gulf between land values in London and the regions is now widening, with urban land values outside the capital rising by an average of just 2.5 per cent over the last six months, from an already very low base.
As ever, the average masks a growing divergence in urban land values between the strongest and weakest markets. South East values have risen 14 per cent since their nadir of June 2009 (having fallen by -52 per cent from peak), but values in the North are down -71 per cent from their former peak and continue to fall.
Across the UK, the Savills index shows that greenfield building land values increased by 2.1 per cent and urban land values by 2.2 per cent in the first three months of 2011, bringing annual growth to 7.7 per cent and 6.7 per cent respectively.
Yolande Barnes, head of Savills research, says:
"These average gains are modest in the context of previous falls. The value of most development land types continues to remain stubbornly low, with the risk that these low values discourage landowners from bringing it forward for development.
"The renewed bout of relatively modest growth is clear evidence that developers have adjusted to the new environment of restricted debt finance, recapitalised to a modest extent and are enjoying some renewed demand for certain types of their new build product."
More land needed
Because homebuilders are focusing their activity only on particular (usually rare) types of smaller sites, with infrastructure provision in place, in high value areas (of which central London is a supreme example) there is an acute shortage of well-located land with viable permissions.
This situation is compounded by a planning hiatus following the abolition of Regional Spatial Strategies and lack of clarity on Localism.
Looking forward, there will be a shortage of developable land unless there is a pick up in new planning consents.
These are now being granted at little more than half the levels seen in 2006 and 2007. In the face of this low supply, Savills forecast a growing housing shortfall, anticipating that England will be short of 1.1 million homes against new household formation by 2016 and 1.7 million short by 2029. Almost half a million of this unit shortfall will be in London and the South East alone.
Barnes says:
"We have begun to see a few large, well-capitalised players investing in strategic land with the aim of delivering serviced plots in good locations. But such activity is not enough in relation to market demand.
"It is good news that the Government clearly recognises the contribution that house building can make to economic recovery and coalition policy seems intent on achieving higher levels of house building through the planning system.
"The stated expectation that "the answer to development and growth should wherever possible be 'yes'" is highly welcome but needs to feed quickly into land supply to make an early impact on the housing deficit."
