Residential Building Land Report - Inner London

Generally, the residential land market is becoming increasingly difficult to value at anything other than the site specific level. Whilst smaller schemes of 14 units or less attract good interest, anything larger is subject to a requirement to provide affordable accommodation. To complicate matters the availability of Housing Corporation funding is now very site specific, and large sites may also be tied into additional Section 106 agreements. In some cases these may specify the transfer price of the affordable element to a housing association.

Within inner London there has been no evidence of sales of sites in Maida Vale and Paddington, and the second hand house market has fallen slightly over the past six months. However, with more stable interest rates, and government encouragement to develop more homes in London and the south east, it is expected that there will be sufficient demand to keep prices keen. Anticipated increases in construction costs, however, may dampen the market.

In Kensington and Chelsea and neighbouring Hammersmith there is no market evidence for bare sites. Whilst the market in second hand property is indicating a slight decrease, demand for development sites in this area is such that prices per hectare will be maintained at the previous level due to scarcity of land and competition amongst developers for prime sites. If the market in second hand housing continues to fall in the longer term then this will eventually be reflected in land prices but there is no evidence currently.

Commentaries for Hackney, Islington, Newham, and Tower Hamlets in 2004 emphasised the increasing densities of new developments and the corresponding impact on land values. Inner City Boroughs have been reluctant to reject schemes on density grounds alone, particularly where significant affordable/key-worker housing is achievable and a socially beneficial land use (eg primary healthcare) can be incorporated into a scheme. A combination of a thriving housing market and densities well beyond Unified Development Plan norms has produced a strong residential land market in recent times.

The balance of these factors is becoming less favourable and consequently the immediate future of the residential market is uncertain: house prices appear to have stabilised and recent increases in interest rates have led to predictions that prices will start to decline, the fear being that the market has 'over-heated.' Developers faced with uncertain receipts and rapidly escalating building costs could potentially increase their inbuilt risk/profit element as a result, reducing the sums available to purchase development land. This possibility is currently being reflected in a reduced number of transactions, rather than an actual decline in residential land values.

It is noticeable that mixed-use schemes appear to be increasingly prevalent, a combination perhaps of both planners' requirements and developers spreading their risk. Disposal of former Local Authority and Hospital land particularly promotes this type of scheme, often with the inclusion of a socially beneficial land use (eg health/education) by virtue of Section 106 or otherwise.

Notwithstanding the geographical factors specifically influencing these locations, the general trend is felt to have created a period of stability in the residential land market.

In Lambeth and Southwark the market for residential land has been showing signs of slowing in recent months. Auctioneers have been advising their clients to trim reserves but even so some lots have failed to reach reserve. The current housing market is uncertain and the increases in interest rates during 2004 have led to predictions of falling property prices. To date local estate agents report prices holding up but fewer transactions.

There have been fewer land transactions in recent months, and it would seem that vendors are trying to maintain prices but purchasers are not willing to speculate on the prospect of dwelling prices rising. An increase in developers' risk/profit and preference for mixed commercial/residential schemes has also been noted.

The sales of development sites that are available show a wide variation when analysed based on price per hectare. Densities of developments vary widely across Southwark and Lambeth, being at their highest in the north of the boroughs, and the price per hectare reflects this.

Whilst price per hectare is a rough guide, the market prefers to adopt an analysis based on the number of habitable rooms and detailed residual development appraisals. As an example, one large site on which two "mini-towers" are proposed as part of an intensive redevelopment scheme, sold for around three times the average price per hectare adopted in this report.

In Wandsworth developers would appear to be taking a cautious approach across the borough. The few sites that have been sold are small infill sites of around 0.1 ha. There have been no significant sales, but any prominent site brought to the market, particularly with river frontage, can be expected to command a premium.

The feeling across much of the country is that house prices have peaked and in some areas there is a suggestion of a slight decline. There is continued uncertainty as to whether houses prices will rise, fall or remain static in the next six to twelve months.

There is generally a continuing lack of supply of residential development land which is particularly apparent in respect of greenfield sites. Many local authorities, particularly across the north of England are reviewing their planning policies, and in the interim have imposed either planning moratoria or, at least, are restricting development to brownfield sites or smaller infill plots. Any developments, which do occur on these sites, are generally at higher densities than would have otherwise been the case.

There is a strong historic link between the fortunes of the housing market and the market for residential development land. Whilst the two markets do not always move in parallel it would be expected that uncertainty in the housing market would be reflected in a decline in the value of residential building land. Developers would normally seek to factor into their development plans the risk of future house price falls and the difficulty in disposing of completed units. The net effect of the residual calculations would be lower sums available for land purchase. However, across many areas it is felt that the lack of supply of available land coupled with continuing long term demand has resulted in residential building land prices holding up, even in areas with falling houses prices.

These opinions of the District Valuers are based on evidence derived from the limited number of land transactions that have occurred over the last six months. The brownfield sites and infill plots that have sold often have particular abnormal sites conditions to overcome that impact on the net amount of money a developer is prepared to commit to the site acquisition. Further, the attitude to affordable housing differs between local authorities and in some cases is site specific and negotiable.

All these factors make analysis and comparison between sites a challenge with the result that the market is increasingly difficult to value in general terms. Each site now has its own individual planning brief and additional planning requirements, including the provision of social housing, to the extent that land values are increasingly site specific.

The trends in the residential building land market may become clearer in the spring once price movements in the housing market itself become apparent and the longer term planning policies of many local authorities are finalised.