The rapid rise in the cost of borrowing, along with the end of Help to Buy, saw the land market slow in Q4 2022, according to latest research from Savills.
Following a steady first three-quarters of 2022, Savills latest development land survey showed a -49% net balance of opinion on the number of bids per site for greenfield land in Q4, compared to the previous quarter, and net balance of opinion of -44% on the number of deals done, as developers felt press pressure to replenish their land pipelines.
Colin Wilkins, head of Savills south coast development team says: “The residential development land market has changed completely in the last year, from a highly competitive market to a much more steady, and selective one, with some developers stating that they have no short term requirement to add to their pipeline.”
This has also resulted in fewer landowners bringing sites to market. The net balance of Savills development agents reporting new sites launching onto the market fell to its lowest levels seen in over ten years, at -54%.
“We expect activity to return in the summer if the more positive sales rates which we started to see in January and February can be maintained, but a full recovery will likely only come in 2024. However, other developers such as Housing Associations and student housing providers, who are not reliant on open market sales will see the quieter market presenting opportunity to build their pipelines with less competition.”
When will appetite for development land return?
The land pipelines of the major housebuilders have remained strong over the past two years – and are currently 15% larger than the 2015-2019 pre-pandemic average. The return to higher levels of buying activity in the land market is likely to depend on the pace of the recovery of transactions in residential market.
Early indicators from the start of 2023 present a mixed picture. The latest Bank of England Money and Credit data reveals that mortgage approvals in December fell for the fourth consecutive month. However, there was an uptick in starts on new plots for in January and February (but starts remain -35% lower than the long term average).
“If the January and February uptick is maintained, we would expect to see more positive starts to come through in our data, with developers to be increasingly confident in starting on new sites. In turn this will likely result in more land market activity from Q2 2023 onwards, as the need to replenish land pipelines increases,” comments Emily Williams, director of research at Savills.
“However, developers are also likely to remain selective with their land buying, with several housebuilders reporting that they are switching their focus to longer term strategic land opportunities. We expect the focus for immediate land to be in areas with the strongest market fundamentals and for the most straightforward sites.”
Alternative sources of demand
Despite weaker appetite for land from developers, Savills is reporting a stronger requirement of sites from housing associations, which were unable to compete in the strong market of the last two years, despite an ambition to build more homes.
According to the 2022 Inside Housing Survey of the 50 largest housing associations, the sector has the ambition to deliver 233,370 new homes by 2027, in line with the target reported in 2021. But so far, housing associations have only secured the land to build 46% of this pipeline.
Savills latest research also reveals a strong appetite for sites from providers of Purpose Built Student Accommodation (PBSA). With student application numbers in the 2023 cycle 6% above their pre-pandemic level and shrinking supply of stock in the private rental sector, there is compelling need for more PBSA across the UK.
Demand for new supply is likely to be strongest in cities like Newcastle , Leeds and Nottingham, where private rental supply has dropped by over 30% compared to the 2017-19 average.