Savills : Land values and activity levels recover to pre-Covid levels, albeit with an eye to risk management

Land values In Q4 have remained robust over the last quarter according to new report from real estate advisor, Savills, with UK greenfield and urban values increasing by 0.3% and 0.6% respectively.

The report also found that activity levels in the land market have been higher than previous quarters, new sites continue to be launched onto the market and buyers appear more motivated - but with an eye to risk management due to market uncertainties ahead.

Land values and the numbers of bids per site have proved resilient, both recovering to stronger than pre-Covid levels in some markets. A net balance of 22% Savills development agents reported that new sites continue to be brought onto the market whilst a net balance of 37% reported an increase in the number of bids compared to normal levels. Lydia McLaren, Savills research analyst says: 'The strength of the housing market in the second half of 2020 has given land buyers more confidence, but with an eye to risk management.'

Smaller sites (50-100 units) in primary locations have continued to attract strong interest over the last quarter, another sign of risk aversion from parties. Deferred payments terms remain common, allowing developers to spread their outgoings. There are also more examples of developers considering conversions of private plots to affordable and bulk sales to Build to Rent. McLaren continues: 'Some developers are looking to de-risk sites as we face increasing market uncertainty with the end of the stamp duty holiday in March, around the same time that unemployment is expected to peak.'

Planning for beyond Help to Buy

Sales rates for the major housebuilders in H2 2020 were very strong, averaging 0.72 sales per outlet per week, and for many exceeding pre-Covid levels. This performance has been fueled by pent up demand after the spring 2020 lockdown, the stamp duty holiday and the 2013-21 Help to Buy Equity Loan scheme which closed for new reservations on 15^th December. Enhanced affordability from low interest rates and buyer demand for more space has also bolstered sales performance.

Despite the changes to the Help to Buy scheme and the ending of the stamp duty holiday, there are strong forward sales for completion beyond March 2021 and cancellation rates have remained stable which provides housebuilders with greater certainty going into 2021. However, there are early indications of recent sales rates returning to more normal levels after a strong performance in H2 2020, which for some is a result of a lack of stock to sell, limiting the number of sales. Many of the housebuilders are anticipating 10-15% fewer completions for the coming year compared to 2019.

Addressing the green agenda

Housebuilders have been factoring higher build costs into land bids in anticipation of the higher energy efficiencies that will be part of building regulations from June 2022.

The Future Homes Standard will require a 75-80% reduction in emissions in new build homes by 2025 compared to current levels, including a ban on gas boilers in new homes, with an interim uplift in building regulations taking effect from June 2022.

Lydia McLaren, says: 'Higher build costs as a result of these changes to Part L building regulations are increasingly being factored into land bids. These additional costs to meet the Future Homes Standard are predicted to be in the range of 1% to 2.5% per house, according to figures published by some of the major housebuilders.'

Many of them are already adopting measures to improve their environmental performance. This includes research into low carbon technologies, developing net zero carbon house types and implementing policies of biodiversity net gain.

McLaren continues: 'Some are making greater progress than others adopting science based targets for carbon reduction and achieving a c.20% reduction in Scope 3 carbon emissions. Despite this progress being made by many, the sector still has a long way to go to reach net zero carbon standards. '

Over the longer term, greater costs to providing net zero standards may put pressure on land values, unless buyer preferences for energy efficiency homes result in a boost to sales rates and/ or prices.