Residential development land values and delivery rates are both set to come under pressure this year in the face of cooling demand and soaring build costs.
Higher mortgage rates and the cost-of-living crisis are also expected to cause a slowdown in house price growth, according to new research from Knight Frank.
The firm’s latest quarterly housebuilder survey and land index found that 44% of housebuilders across England were “significantly” hit by build costs during Q1, while nearly half reported a “moderate” impact. The team at Knight Frank said these higher costs have largely been offset so far by the pace of house price inflation.
Most housebuilders have been bracing for build cost inflation and supply chain disruption, with 40% expecting those factors to have the biggest impact on the sector during Q2. More than a quarter expect planning delays to be another challenge.
Battling logistics
An 85% majority of housebuilders highlighted land shortage as a growing concern, with increasing competition from industrial and logistics players adding to the pressure.
Some 56% of housebuilders noticed growing competition from logistics and other land use classes. Researchers noted that developers are often outbid for sites, including those with existing residential planning permission.
Given the squeeze on land supply, nearly half (47%) of housebuilders predicted that land prices will rise again next quarter, while a slightly smaller number – 44% – believed they will stay the same.
Greenfield drives value increases
Despite any concerns, land values have remained strong so far this year on the back of limited supply. Greenfield sites outside of London saw the highest demand during Q1, where house price inflation offset build costs. Greenfield values surged by almost 23% compared with the same period last year, and were up 5% on the previous quarter.
Average land prices in prime central London were up 2.5% on a quarterly and annual basis, marking the first time that prices in the area have risen since Q3 2020. The recovery was driven by relaxed travel restrictions, a stronger sales market and limited land supply.
Brownfield land prices were up 3.3% year-on-year, increasing by 0.4% on a quarterly basis.
Elsewhere, land transactions surged by 55% during the 2021-22 financial year, compared with the previous year.
The research also showed that a growing number of housebuilders are seeking bulk deals with build-to-rent operators to de-risk their schemes. BTR accounted for 41% of sales in Q1, up from 38% in the previous quarter.
Demand cools
Justin Gaze, head of residential development land at Knight Frank, said: “At present, land continues to sell at a premium as a result of limited supply.
“However, going forwards, it is likely that land prices will come under pressure as demand for housing cools and build costs increase. Higher mortgage rates and a cost-of-living crisis mean we expect UK house price growth to slow later this year.”
Anna Ward, senior research analyst at Knight Frank, said: “Housebuilders have largely been able to offset the increase in build costs due to the pace of house price inflation. The strong sales market led to a surge in land transactions up to the end of Q1 this year.
“Knight Frank saw a 55% increase in land transactions in the 2021-22 financial year, compared with the previous year. A lack of availability of land is expected to support land market values in the short term.”
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