Residential development land values halve in 12 months

The latest index figures show that urban and greenfield land values dropped by an average of 17% and 14% respectively outside the capital during the final three months of 2008.

Prime London, which had until now remained relatively resilient, saw the steepest drops, with super-prime development land falling in value by 33% in the quarter alone. Development sites in Inner and Outer London lost a quarter of their value during the same period.

Jon Neale, head of development research at Knight Frank, said: "This unprecedented fall in land values – experienced right across the UK – is a reflection of the ongoing problems with securing finance for development and the continuing crisis in the housebuilding sector.

"Very few developers have cash or can access bank finance, and those that are in a position to buy are adopting an extremely cautious strategy. Only extremely well-located sites, or those suited for larger family homes, are attracting interest – or, indeed, qualify for bank backing. Demand has dropped by between a third and a half, depending on location.

"Indeed, many more in the development sector are looking to dispose of land, as a result of pressure from funders and the fact that reduced activity levels mean that many sites are superfluous to requirements. Nevertheless, supply has dropped as other landowners opt to wait for more optimum market conditions."

The index also measures the market share taken up by various vendor and buyer groups. Housebuilders and other residential developers represent, at 27% of the market, the largest slice of those selling land. Meanwhile, speculative land investors are the single biggest buyer group, at 24% – followed by the housing associations and private landowners.

Neale said: "It is clear that the conditions are being created for a large-scale transfer of development land, from housebuilders to private investors and landowners as well as the public sector, in the form of Housing Associations backed by funds provided by the Homes and Communities Agency.

"There is little sign of any mass movement – indeed there are very few sales occurring at this moment in time. However, many players believe fair value is approaching and we believe prices have a further 10% to fall before stabilising over the summer. After this point, transactions should become more commonplace."

With the sales market still depressed, there is a danger than many new landowners may hold land undeveloped as a long-term asset, further frustrating Government targets for housing delivery. There are also indications that many investors are considering the option of building properties that will be held as rental units in the short- to medium-term.

Neale said: "The first-time buyer market is likely to remain subdued for some time, particularly if the recommendations of the Turner report are followed and the mortgage market becomes highly regulated. This will help sustain demand for rental property in the longer term. With land values at a low ebb, it is unsurprising that some institutions and developers are seriously considering the option of buying land and building flats and houses as long-term investments."

Typical land values outside London now range from around £250,000 per acre for more peripheral sites in cheaper regions to more than £1million per acre for the best sites in the South East and East of England. London prices are far more variable – more than £3million per acre is typical in inner boroughs, but more than £15million per acre is achievable in prime locations.

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