Property News > Residential land values currently being affected by build costs and economic uncertainty

Residential land values currently being affected by build costs and economic uncertainty

New research has found that the value of residential development land is suffering due to a combination of increasing build costs, patchy house price growth and economic uncertainty.

Data from real estate firm Knight Frank shows a 0.6% drop in the average greenfield development land price during the fourth quarter of 2018, meaning annual growth ended the year at 0.6% overall. Meanwhile, urban brownfield development land prices returned to growth, climbing 1% during the quarter but year on year values are still down by 0.5%.

Additionally, Knight Frank’s index shows a fourth quarter fall of 2.8% in prime central London areas – the highest percentage decrease recorded across the UK – taking the annual decline to 5.6%.

While values are falling, labour costs in the construction industry continue to creep up, and the cost of importing building materials is also increasing due to the weakening of the pound.

It has claimed anecdotally that the number of visitors to sites remain high, although potential buyers are taking longer to weigh up their options before committing to purchases, particularly in more southern regions of England.

The report also suggests that the continued uncertainty surrounding Brexit is encouraging developers to attempt to increase their margins, which in turn is suppressing growth in greenfield land values.

The figures recorded by Knight Frank represent the first annual decline in urban brownfield land values since the firm began tracking such data at the back end of 2015. During this period, Birmingham City Centre has led the way in terms of growth due to a lack of supply, although it has been highlighted that an increase in the amount of land market activity during the past three years has meant a high quality pipeline is emerging.

Developers are likely to be increasingly selective when purchasing land during the coming quarters, the report also points out, and since the market peaked in the third quarter of 2015, land values have dropped by almost 20% in prime central London areas. This has led many speculators to believe that these regions now represent good value – particularly with the weakened currency.

That said, further complications arise through the uncertainty attributed to Brexit, with many land owners adopting a ‘wait and see’ approach, despite the fact that sites of all types continue to transact, though in low volumes.

‘There is considerable uncertainty surrounding the political environment. Any business, be it manufacturing, housebuilding or professional services needs clarity in order to inform their decision making process,’ said David Fenton, UK head of regional land at Knight Frank.

‘Across the UK, businesses cannot plan for the short to medium term, therefore we have seen the housebuilders pricing in higher margins to address the unknown risks going forward,’ he added.

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