UK Residential Land Price Index Dips in Q2, Despite Being Land Constrained

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Based on global real estate consulting firm Knight Frank's latest UK Residential Land Development Index for Q2, 2012, London's development land held on to last year's 20.3% price increases, while prices in the rest of the UK have fallen by 0.4% in the last Quarter.

Knight Frank's Gráinne Gilmore tells World Property Channel that their development land index signals that prices slipped slightly outside London in Q2, partly reversing the 1.3% rise seen last year. London prices remained unchanged for the second quarter in a row.

Gilmore further comments, "Given the lack of house price growth outside London, there is little reason to expect a rise in land values in the short term."

The UK

The price of development land across the UK fell marginally between April and June, after no change in the first quarter of the year. This comes after a 1.3% rise in values last year. Land prices are broadly mirroring the movement of mainstream house prices in the UK, which have fallen by around 0.3% since the start of the year.

Given the lack of house price growth across the UK, there is little reason to expect further increases in land values in the short term.

On the other hand, the finite supply of development land, caused partly by the backlogs and uncertainty in the planning system, is to some extent putting a floor under land prices.

But there are concerns that the new Community Infrastructure Levy (CIL) which is currently being looked at across the UK could change this balance.

Any additional cost levied on house builders or developers is likely to have a negative effect on development land values as this is where such a cost would be recouped.

The CIL is being viewed as just such a cost. There is also disquiet that the levy has yet to be finally decided in many areas, creating uncertainty over what the charge might be.

The outlook is for no sharp price movements for UK development land in the near future, unless the extra cost of CIL tips the balance, or house prices take a sharp downward turn.

Prime Central London

Development land values remained unchanged again in the second quarter, after jumping by 20.3% last year.

The trend in the market in the second quarter also remained much the same as in the first three months of the year, with good levels of demand for stock where developers and investors see opportunities for a realistic and deliverable margin.

While the market has an appetite for development risk, it will not speculate on planning risk. As a consequence, the unconditional trading market now has a sensible risk-reward arbitrage. We see this position remaining for the long term.

The funding environment remains tough and as a consequence the market is becoming increasingly dominated by balance sheet buyers and high-net-worth investor developers. Pure equity investors are finding the market a difficult environment to place capital into as their IRR expectations are suppressing their bidding competitiveness.