Development land values across the UK have changed very little in the last three months. Greenfield land values decreased by 0.1% in Q3 2015 (0.9% growth in Q2 2015) bringing annual growth to 1.9%. Growth in urban land values in Q3 2015 was 0.2%, slowing from 3.7% growth in the previous quarter. Annual growth for urban development land stands at 7.2%, exceeding that of greenfield land and residential development land in London. Residential development land values in London have not changed in the six months since March 2015.

<sup>NB Residential development land values that are used to calculate the index include the provision of affordable housing which contributes less to land value than in 2007.

Source: Savills Research</sup>

London

Residential development land values in London have remained flat over the last six months (zero growth over the period). Sentiment for residential development land in London remains positive and sites continue to attract a strong number of bids. Land outside central London has seen more attention as housebuilders and developers look for opportunities to seek better development margins and to provide homes in markets with greater depth of demand.

Development land values for other uses have seen stronger growth, with those for hotels increasing by 2.2% and offices increasing by 6.4% over the six months to Q3 2015, closing some of the gap with residential values. The growth in values for office use is due to the relatively active office market with more demand for new and refurbished space from both occupiers and investors. This is particularly true in the core central London office market as a result of rising demand and a lack of stock. However, we expect to see more developer interest in 2016 in edge of City locations.

Rest of the UK

There are several factors contributing to the flattening of development land values and the more neutral sentiment for greenfield land. This has softened from the return to positive sentiment in Q2 2015 (the balance of opinion down from +69% in Q2 2015 to +40% in Q3 2015).

Firstly, many housebuilders have built up enough consented land for their needs in the short term (on average the listed housebuilders have 5.3 years’ worth of land to build out at existing build rates before accounting for controlled growth in volume from these levels). However, location matters and there is still strong demand for land in markets with links to large centres of employment where there is a scarcity of sites.

Secondly, labour availability continues to be a major constraint according to the HBF survey. Thirdly, build costs continue to rise (5.4% in the year to Q3 2015 according to BCIS) and lastly, recent policy announcements have led to some uncertainty in the industry.

Despite this, sentiment for urban land remains unchanged according to our survey of Savills agents (the balance of opinion stands at +59%). The positive sentiment and price growth for urban development land reflects an improving market recovering from a lower base which is a more positive environment for new policies designed to bring forward additional brownfield land.

Other tenures

Demand for development land for tenures other than market sale is becoming more common in city locations. In places such as Birmingham, Manchester and Leeds demand has been strong from the private rented sector (PRS) whilst in places such as Cardiff and Coventry student housing has led demand.

The retirement home sector is also growing and there is an associated demand for land. McCarthy & Stone (who have recently announced their intention to float on the London Stock Exchange) have acquired 22% more sites in the last financial year compared to the previous year and are on track to increase their output to 3,000 homes per year in the medium term from 1,923 in the last year.

Outlook

Sentiment remains positive

We expect demand for development land in the best locations to be maintained especially as sentiment for urban land remains positive. Elsewhere, housebuilders will continue to replenish their land banks as they continue to keep up their level of output. The full effects of the Starter Homes policy on development land will be better understood when more details are known.

The demand for development land in London is expected to continue. The pressure for more homes will ensure housebuilding continues although as house price growth slows land values are likely to remain stable. Due to the high value of residential development land, development activity for office space is likely to be constrained in central London locations, though we expect to see increasing levels of interest for commercial developments in peripheral office locations alongside residential.