The development land market remains characterised by significant uncertainty associated with the outbreak of COVID-19.
We have witnessed a slowdown in market activity, with fewer development land transactions, because of the restrictive ‘lockdown’ measures put in place by central Government between March and May 2020.
Housebuilders have remained focussed on preserving cash flow and restructuring their businesses. In addition to this, the pace of transactions has been constrained in some cases by a lack of staff resource in land teams. We anticipate that this will now improve as employers start to bring staff back into work.
The easing of restrictions on construction sites from the beginning of May allowed many housebuilders to resume operational activity. This was welcome news and housebuilders began to achieve cashflow within their businesses again, initially through affordable housing contracts and then through private sale completions.
Despite this, there remained a significant lack of ‘post lockdown’ market sentiment through much of May and June, with some purchasers wanting to understand the reaction of the housing market before proceeding with further land acquisition.
At this time, housebuilders set out to rely upon their ‘reservation rate’ (the rate at which available new homes are reserved for purchase) as the first indication of such market sentiment. From our experience, most housebuilders were initially forecasting reservations at a rate equivalent to 50% of what they would usually anticipate in a functional market.
To the surprise of many, positive trends have emerged since the reopening of the housing market on 13 May 2020, including:
- Pent-up or latent demand in the housing market that developed during lockdown
- An apparent increase in demand for homes in regional locations across the country, with purchasers looking to move away from metropolitan areas, into properties with larger curtilages, greater amenities and open space
As a consequence, many house builders are realising reservations for new homes at 80% of what they would otherwise anticipate in functional prime markets. This has been recognised by some as a return of confidence and as a result we have begun to see our clients achieve land sales, in some circumstances attaining sales at values agreed before the pandemic begun.
Our view is that the development land market remains underpinned by strong market fundamentals in the residential property market, principally a continued lack of stock.
Furthermore, the Government’s new mantra to ‘build build build’ and its desire to utilise the development industry as a key pillar for any economic recovery, will add greater certainty in time, with an encouraging legislative agenda of planning reform in the short and longer term.
Equally however, we would comment that there is now an emerging polarisation in the development land market, with an equal share of purchasers taking a more cautious approach to new land acquisitions. This is now manifesting itself either by attempts to renegotiate terms or withdraw from sales altogether.
As the UK moves toward realising the full economic impact of this pandemic, there is growing uncertainty in respect of the purchasing power of home buyers, the availability of mortgage finance and ultimately the demand for new homes.
We anticipate that this economic uncertainty will have the most significant impact upon small and medium sized housebuilders that remain reliant upon development finance to progress land acquisitions. We therefore consider that, in respect of development opportunities of up to 50 dwellings, best results will be achieved where there is a clear understanding of purchaser profile and funding arrangements.
Demand for strategic land remains resilient and our activity has been uninterrupted through lockdown. The longer-term return profile remains appealing to housebuilders and investors alike, together with the fact that opportunities can be secured without the same requirement for ‘upfront’ entry costs.
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