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Competition grows for rare London land

Central London land values are particularly notable in having achieved double digit growth over the past six months. This land value growth is a full, nine percentage points ahead of the growth seen in the value of underlying prime residential property, according to the Savills development land index.

Central London land values rose by 12.5% in the last two quarters, bringing the average value of land for residential use to almost double that for hotel or office uses.

Anecdotal evidence suggests these averages may understate the prices being achieved for the rarest residential sites and there are reports that some are now achieving prices approaching peak values last seen in 2007.

Office land values in central London increased by 11.6% and hotel values grew by just 5.7% in the six months to March 2011 but this bounce in values fails to dent the supremacy of residential as the most viable land use in all the central areas studied – even the City of London.

This has important implications for commercial developers who are increasingly looking to include residential uses on a scheme to make it viable.

Savills anticipates that mixed use will increasingly become the norm for new London developments.

In addition, with the proposed changes to use class legislation making B1 (office) use and possibly other commercial use classes instantly convertible to residential use, it will become increasingly difficult for commercial developers to compete with residential in London where burgeoning demand and very limited supply in central areas is likely to continue boosting residential values and development viability.

Outside London, the gulf between land values in London and the regions is now widening, with urban land values outside the capital rising by an average of just 2.5% over the last six months, from an already very low base.

As ever, the average masks a growing divergence in urban land values between the strongest and weakest markets.

South East values have risen 14% since their nadir of June 2009 (having fallen by -52% from peak), but values in the North are down -71% from their former peak and continue to fall.

Across the UK, the Savills index shows that greenfield building land values increased by 2.1% and urban land values by 2.2% in the first three months of 2011, bringing annual growth to 7.7% and 6.7% respectively.

"These average gains are modest in the context of previous falls," said Yolande Barnes, head of Savills research.

"The value of most development land types continues to remain stubbornly low, with the risk that these low values discourage landowners from bringing it forward for development.

"The renewed bout of relatively modest growth is clear evidence that developers have adjusted to the new environment of restricted debt finance, recapitalised to a modest extent and are enjoying some renewed demand for certain types of their new-build product."

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