Smart property developers are on the property investor merry-go-round
Increases in greenfield and brownfield land prices are putting upward pressure on house prices. Combined with the rising cost of the build, the government’s target for affordable homes looks increasingly difficult to fulfil. Nowhere is this more evident than in London.
As we examine in this article, property developers are spreading out from London. This evolution along with affordability issues in London could extend the current period of disparity between London and regional house price growth – and opportunity for property developers.
The new price dynamic and development strategy
The Brexit vote certainly highlighted London’s residential property affordability issues. Since the end of the Global Financial Crisis and Great Recession, house prices in London have spearheaded national growth. In some regions, house prices are barely above their 2007 levels.
As the London market cooled, London’s property developers started to shift focus, looking for opportunities in regional cities that offer greater value from the ground up. Sadiq Khan’s London Plan now appears flawed. Planning constraints imposed are exacerbating the developer emigration from London.
Developers are now firmly focused on urban land in the commuter towns of today and tomorrow. Birmingham has replaced London as the magnet for residential property development, though for developers the major land target is urban centres, in commutable locations, with the opportunity to build apartment blocks.
The outcome is that land prices are growing fastest in cities and towns where house prices are growing fastest. In London, where house price growth has slowed or reversed, land prices are stagnating or falling. Elsewhere, land prices are rocketing.
Regional land and property prices
Property developers are shifting their sights. Rather than London and its outskirts, developers are seeking opportunities in commuter towns such as Chelmsford and Colchester, Luton and Bedford. We’ve seen investor focus shift similarly, as they look to capitalise on greater affordability and the lifestyle that attracts people from London and into the commuter belt.
Consequently, land prices in the commuter towns have been rising. Over the last year, greenfield land prices have increased by an average of 2.1%, having grown by 0.8% in the first quarter of 2018. However, cities and towns further out from London are now outperforming.
Our investor clients started to shift their focus from London even before the Brexit vote. Cities such as Birmingham (currently the UK’s star performer) were top of the investment list for their potential. The new High-Speed Rail network will transform Birmingham, making it a residential destination for people working in London. When high-speed services begin, Birmingham will be a shorter commute time into the City than Chelmsford is today.
Property prices in locations such as Coventry and Solihull have increased by 8.5% and 7.6% over the last 12 months – around twice the national average.
Land values in Birmingham have followed the increases in its property prices (up 8.6% over the last 12 months). Average urban land value growth across the UK is 6.3% over the last year. But this doesn’t tell the whole story. In some areas in the centre of Birmingham, land prices have doubled from this time last year. Regeneration and demand for high-density properties are driving land prices higher.
London land values follow property prices south
While not every borough in London has seen property prices decline, values have fallen by an average of 2%. In prime central London, residential property prices have come back by 4%.
While Brexit focused investors’ sights on affordability in the capital, Sadiq Khan’s response may not be producing the answers he expected. London’s mayor is requiring developers to include 35% affordable housing on their developments. Simply unachievable in many parts of London.
Looking to outlying boroughs, the land has been in demand – especially from housing associations. But developers and housing associations desire sites of more than 100 properties. Smaller sites don’t offer the economy of scale needed to be profitable. The London Plan preferences smaller sites. There is less competition for these, and Mayor Khan’s target of 24,600 new homes per year is beginning to look increasingly difficult with the planning constraints contained in his London Plan.
Land values in central London have fallen by 2% over the last 12 months, and by almost 12% over the last three years.
Summing up
The current environment is helping to determine property developers’ strategies. The fundamentals that have underpinned property investment in the UK over the long term haven’t changed, despite Brexit. But the focus has shifted, away from London and to the regions.
Increasing build costs may limit how much property developers are prepared to pay for development land. Yet with demand for homes likely to continue to increase in regional cities (especially new commuter towns that benefit from massive investment and regeneration), the land will probably continue to be bought in urban centres – resulting in further upward pressure on residential property prices.
It may not be so much a question of which came first, the chicken (rising property prices) or the egg (rising land prices), but rather a question of are you on the property investor merry-go-round, and developing sites where investors want to buy?
So, uncertainty over the future of the policy is likely to be reflected in English greenfield land values in the coming quarters, coupled with house builders factoring into their margins the unclear economic picture ahead.
The report also says that the fundamentals that underpinned demand in the fourth quarter of 2017 remain unchanged. However, high build costs are increasingly limiting how much developers are willing to pay for the land.
Our investor clients are actively seeking property investment opportunities in the UK’s major cities and commuter towns. Let us help you ignite your early-stage sales with our off-market, off-plan sales expertise and our global investor reach. Call us today on 0207 923 5680.
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Brett Alegre-Wood