Much has been made of the declining residential house prices across the world, but not so much has been said about residential development land – an asset which has seen an even more spectacular collapse in its value.
Some estimates suggest that some development lands have fallen by more than 55 per cent on average across the UK – or as much as 60 per cent in some specific areas – since the highs of 2007. This scale of loss is far greater than that which has been seen in the price falls for houses and apartments, about 25 per cent on average across the country and as much as 40 per cent in some pockets.
Now Savills, the property consultancy and real estate agency, has issued a warning that in the UK at least it may take many years – possibly decades – for this land sector to recover to its pre-recession values, and that it may require new thinking to create funding models that make residential development 'work' in financial terms.
The analysis by Savills – the firm whose research team is now almost-universally regarded as the best informed in the UK, if not internationally – goes like this.
First, small-scale plots which are "fully serviced" (that is they have detailed planning consent, design codes in place for the homes that will be built there, and even infrastructure and utilities arranged) will be increasingly sought-after by developers who are willing to pay quickly and with a premium for low-risk land acquisitions. These sites will allow only schemes of under 50 units to be built, but as a result these will in turn require little borrowing – exactly what many developers want these days.
Secondly, a new market may emerge for entrepreneurs who want to turn what Savills calls "strategic land" (that is, plots without planning consent or any significant infrastructure) into land that meets the lower-risk "fully serviced" criteria. This means that firms will handle many of the planning-related activities previously undertaken by a developer when it took a site from grass to completion – those activities include getting planning consent, agreeing likely infrastructure including possible "planning gain" construction that will be required by local government, and calculating likely build budgets for any developer who subsequently purchases the site.
"We expect to see the emergence of new longer-term equity investors and land promoters better able to provide different development and funding models. These new buyers of land would have the opportunity to secure the best deals while the land market is at its nadir," explains Yolande Barnes, research head at Savills. So far so good, and the Savills analysis suggests interesting new challenges for these companies that may emerge turning strategic land into oven ready sites.
But the main question in the shorter term is what to do with stalled developments?
These developments are either in some form of planning or are actually part-built. At first sight, the developers behind these schemes cannot win.
If the developers continue to build they will suffer losses should they sell completed units at low 2009 prices because the land was bought years ago at far higher prices than now. Reduced-price units mean reduced profits or, more likely, deep losses.
Just as bad is the situation for those developers who cannot even afford to continue to build, even if they feel they can sustain the losses from selling units at lower prices than expected. These developers are unable to borrow to finish their schemes.
Who knows how this short term dilemma will be resolved, and the Savills report is unable to identify a killer solution.
In all likelihood, those developers most crippled by the credit crunch have gone into administration already – those remaining are probably large enough to absorb their losses on the schemes now under construction.
So what of the future? Well, if today's land crisis really does lead to a greater demand for small-scale fully serviced sites, then expect to see smaller schemes of new homes in years to come. No longer will there be any funding or appetite amongst developers for large site acquisitions with long build-times and higher risks for all concerned.
Instead, the serviced sites will be small enough to guarantee building will be on a more modest scale – possibly with what Savills calls "place making" as developers move towards constructing genuine communities with infrastructures, not merely estates of homes.
What's so bad about that? Actually, nothing. Everyone from hard-nosed developers and institutional investors, to buyers and tenants, would benefit from a more restrained approach to construction. Today's land problems may inadvertently produce tomorrow's more humane communities – an unexpected bonus coming from the trauma of the credit crunch.
There are innovative suggestions emerging from the UK Government in its bid to make homes more environmentally-friendly.
After big brother initiatives imposed from above – strict build regulations for new homes from 2016 and unpopular "eco-communities" set up in law – the government has recognised it needs to persuade home owners, not bludgeon them.
So two rather novel financial incentives are being unveiled.
The first comes in the autumn when there will be low-interest easy-to-obtain mortgages for home owners wanting to improve their property with, for example, solar panels or ground source heat pumps. The second comes into effect now. It is that home owners with their own electricity-generating features – small wind turbines, for example – will be able to sell "spare" electricity to the UK's National Grid, which controls this energy across the country.
The price which home owners will get from the National Grid is being set sufficiently high to make it worth their while to invest in renewable sources of power generation.
Local energy suppliers will adjust the charges they levy according to the volume of energy fed back from homes in that area, so property owners may well end up being paid for 'spare' power. Such a scheme is likely to change the skyline of the UK's homes. No longer will there be merely grey-tiled roofs – expect to see solar panels, photo-voltaic tiles and even the occasional wind turbine.
At last it seems the UK Government is finding a successful way of spreading the green message in the world of domestic property.
- The writer is a property correspondent with the London Observer
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