A tale of two markets for residential development land

2006 was a year of mixed fortunes for residential development land; greenfield land values increased by 6.1% but a -0.4% decline was recorded for urban land values, according to the latest research from Savills.

Yolande Barnes, Director Savills Research comments, “Scarcity has played a major part in the reversal in the fortune of the greenfield land sector. Previously values were influenced by housebuilder confidence, but other factors came into play last year and reduced this influence.”

It is now a combination of greenfield scarcity, and developer preference for these sites over urban/brownfield development that has protected greenfield land values.

Barnes again, “The level of growth has been restricted by the uncertainty generated by the continuing Planning Gains consultations and PPS3 combined with the unprecedented rise in build costs now facing housebuilders.”

There were some notable regional variations. In Wales the annual increase was 14.7%. This was largely driven by a strong market in Swansea with developers capitalising on the increase in house prices in the area, and was complemented by the positive planning regime operating in the region which has allowed for increased market activity. The other major growth in values was for sites in the Eastern region where values increased by 9.1% during the year mainly on the back of site scarcity around Norwich and Ipswich.

Barnes continues, “We expect this upward trend in greenfield values to continue this year, but the possibility of an introduction of a Planning Gains Supplement after 2009 may create enough uncertainty to limit growth to around 8%.”

Despite another annual decline in the value of urban/brownfield sites, the downward trend was much reduced last year suggesting an improvement in the fortunes of this sector.

Barnes comments, “Combined with the uncertainties associated with greenfield sites, the performance of the city centre flat market had the greatest influence. In several locations a waning demand for some city centre flats combined with a surplus supply has led to a drop in land values or at least a slowdown in value growth”.

However, a marked fall in values has been prevented by the restrictions placed on greenfield development, which has forced housebuilders to continue buying brownfield sites and in some areas a lack of good, easy to develop city centre sites has played a part in keeping values buoyant.

On a regional basis, Scotland bucked the trend with an annual increase in values of 2.9%. This upturn was driven by increases in demand for sites in Stirling, Perth and Aberdeen, which housebuilders now regard as safe alternatives to Edinburgh and Glasgow, where there has recently been an oversupply of large two-bedroom flats.

The Eastern region showed the most marked regional fall during 2006 mainly due to the depression in values in the East Midlands, where values fell by -5.6% in response to a reduced demand for city centre flats in some locations as well as rising build costs.

Barnes concludes, “We expect to see a small turnaround for urban land values to positive growth, due to a general improvement in the city centre flat market and high demand for sites in areas of scarcity. However the increasingly complex nature of brownfield development combined with growing remediation and build costs is likely to limit this growth to around 1%”.