UK Residential Development Land, January 2012

Nationally, land markets are stagnant, but there are distinct ‘bright spots’ as housebuilders target smaller, readily developable sites in buoyant local markets, pushing up values.

• There is demand from the larger housebuilders for larger lot sizes in good locations, but supply is tight.
• Government initiatives aim to improve the viability of more sites. Of particular relevance are proposals to allow renegotiation of section 106 requirements.
• Land prices: Qtrly change (lhs) Developer's sales expectations (rhs)
• Mortgage Indemnity Guarantees aim to facilitate up to 33,000 new home purchases each year. This could have a positive impact on housebuilding volumes – and in turn fuel land activity.
• The greatest threat to the land markets in the coming year will be the state of the economy more broadly, and is likely to result in no price growth.
• The outlook for the ‘right’ land in strong local markets is rosier. While price growth is still likely to be limited, prospects for transactional activityare better. The greatest threat to the land markets this year is the weakening economic outlook. Oxford Economics forecasts UK GDPgrowth of just 0.4% in 2012. With higher unemployment and real income growth stagnant, the increased economic stress will be felt in the market.
• Our own forecasts are that average UK house prices will fall by -2% in 2012 and remain low for the next five years. Housing transaction levels are also likely to remain low which will suppress developer confidence – and hence demand for some types of land. Activity will be healthiest in higher value towns and cities.
• The challenge will be sustaining the supply of viable land, which is where new government initiatives may help, though it will take broader improvements in the economy and housing market before sustained value growth is seen.
• Overall, we expect our land index to remain unchanged by the end of the year, reflecting small falls in some locations, and modest rises where competition sharpens pencils in the most lucrative markets.