2023 was a challenging year for the residential development land market due to a subdued new build sales market caused by rising mortgage interest rates and the end of the Help to Buy Scheme.
A number of the PLC housebuilders withdrew from the land market as a result, focusing instead on their existing landbanks, while others took a more selective approach to land buying with an increased emphasis on due diligence and a requirement for deferred payment terms to reduce their exposure to risk. Housebuilders also slowed build programmes with some switching units to alternative tenures such as build-to-rent or affordable housing to increase the speed of delivery on site.
The slowdown in build programmes and reduced material costs have caused build cost inflation to slow from the peaks seen post-pandemic. Costs have however increased in other areas, with developers having to factor items such as the Future Homes Standard which is set to be implemented in 2025 and Biodiversity Net Gain which came into force in February into their bids for land.
The Competition and Markets Authority (CMA) published its housebuilding market study report in February which found that the complex and unpredictable planning system, together with the limitations of speculative private development is responsible for the persistent under delivery of new homes, not land banking by major housebuilders which was found to be a symptom of these issues. The report also highlights that many planning departments are under resourced, and do not have clear targets or strong incentives to deliver the numbers of homes needed in their area. These conclusions were of little surprise to anyone active in the industry.
The number of sites granted planning permission in the year to September 2023, was 245,872 – a 15% drop on the previous year and the lowest for a 12-month period since Q3 2015, according to the HBF. The ongoing lack of supply is supporting competition and the value of consented sites in good locations, and this looks set to continue due to the uncertain planning environment in the short to medium term.
There continues to be strong demand for strategic land opportunities from both promoters and housebuilders, although the uncertainty around planning policy has meant they are considering up-front costs and the length of terms more closely.
It is challenging to predict how the development land market will perform in 2024 with the economic and inflationary uncertainties that persist. In the first quarter of 2024, we have sensed that there is growing positive sentiment in the market. Developers are reporting improved sales rates in many areas, and the stabilisation of interest rates over recent months, with the anticipation of reductions in rates in the next quarter, should see mortgage availability increase.
Opinion polls suggest that the General Election due before the end of 2024 will see a Labour government elected but this appears to have been priced into the land market, with Labour having historically been more supportive of housebuilding than the Conservatives.
As a result of the above, 2024 has seen several PLC housebuilders returning to the market. The number of sites being launched has increased in Q1 due to the more positive market conditions and we expect activity to continue to increase during the year if the housing market remains stable.
In a more competitive land market, we anticipate that less conditionality will be applied to offers by developers, with more emphasis on up-front rather than deferred payments, to give parties the edge and allow them to secure sites.
