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Residential development land price growth slows

According to Knight Frank’s Residential Development Land Index, Q4 the only urban market which avoided price falls was the prime London market which registered no change over the quarter.
The recent slowing in quarterly growth has pulled back annual rates of growth, which had hit 26% in prime London in Q2 2010. Greater London annual price growth ended the year at 4%, down from the 14% hit during the summer.
Despite rising values during 2009 and 2010, average residential development land values as at December 2010 were still 40% below their Q4 2007 peak.
Liam Bailey, Knight Frank’s head of residential research, said: “The residential land market has been a fairly bright spot in the property sector over the past two years. While volumes of transactions were well down on peak levels – there has been a steady recovery in pricing – on average, values have climbed by around 20% from their early 2009 low.
“As we move into 2011, gathering problems are emerging, which seem likely to pull back some of this recovery in values.
“Funding problems continue to provide major difficulties for developers. In most cases there is no funding available for sites without planning consent, and even for land with a consent, loan-to-values of 50% and possibly 60% are the maximum provided.
“The few cash buyers in the market, who drove values forward in late 2009 and early 2010, have already spent a significant amount of money on sites over the past 24 months and are running low on funds. 
“There is a risk for 2011 that with an increasing level of stock coming into the market, out of Bank restructuring, supply will begin to rise just as demand is falling back.
“Our view is that land values are likely to fall back in 2011, but land transactions are likely to rise as supply rises from receivers begin to edge higher.
“That said, there are some positive market trends which should support pricing in the more desirable areas of the country – especially Greenfield, southern England markets.
“The main support for the land market is the ongoing scarcity of new build properties, with 2010 new-build completions estimated to be c.101,000 (for England), still 42% below the total reached in 2007.”

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