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UK residential development land values edge down

Given the lack of house price growth across the UK, there is little reason to expect further increases in land values in the short term.

On the other hand, the finite supply of development land, caused partly by the backlogs and uncertainty in the planning system, is to some extent putting a floor under land prices.

But there are concerns that the new Community Infrastructure Levy (CIL) which is currently being looked at across the UK could change this balance.

Any additional cost levied on housebuilders or developers is likely to have a negative effect on development land values as this is where such a cost would be recouped.

The CIL is being viewed as just such a cost.There is also disquiet that the levy has yet to be finally decided in many areas, creating uncertainty over what the charge might be.

The outlook is for no sharp price movements for UK development land in the near future, unless the extra cost of CIL tips the balance, or house prices take a sharp downward turn.

Development land values remained unchanged in Prime London again in the second quarter, after jumping by 20.3% last year.

The trend in the market in the second quarter also remained much the same as in the first three months of the year, with good levels of demand for stock where developers and investors see opportunities for a realistic and deliverable margin.

While the market has an appetite for development risk, it will not speculate on planning risk. As a consequence, the unconditional trading market now has a sensible risk-reward arbitrage. We see this position remaining for the long term.

The funding environment remains tough and as a consequence the market is becoming increasingly dominated by balance sheet buyers and high-net-worth investor developers. Pure equity investors are finding the market a difficult environment to place capital into as their IRR expectations are suppressing their bidding competitiveness.

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