Both Savills and Knight Frank report considerable drops in the value of urban development land as the credit crunch squeezes developers’ appetite to do deals

The value of urban development land outside London has fallen by a third over the past year and by 15% in the past quarter alone.

According to Knight Frank, Yorkshire and Humberside have been hit hardest by the downturn, with land in both categories now worth around half its value a year ago. The North-West is close behind, with drops of 41% and 36% reported for brownfield and greenfield sites respectively.

The capital, meanwhile, has avoided the full impact of the downturn, with prices in Inner London falling by just 10%. Outer London areas have fared only marginally worse, with a fall of 15%.

‘Super-prime’ sites in the most sought after areas of the capital have barely been affected. Demand has dropped by as much as half, but still vastly exceeds supply, with some sites still capable of fetching the equivalent of £100m+ per acre.

Patricia Lucke-Hill of Savills said last week that the biggest price falls had taken place in urban development land values due to new homes values having been squeezed and, on top of that, interest rates going up and the amount banks were willing to lend gone down. Buyers were factoring in a hedge against price falls in their profit on cost requirements. Consequently this has hit developers’ appetites to do deals.

Jon Neale, head of development research at Knight Frank, said: ‘Over the past year, developers have put their land acquisition activities on hold, which has dramatically reduced demand for sites – by as much as 60% in some parts of the country.

‘Developers have found it almost impossible to access finance to buy land, while the pronounced slowdown in the sale of new homes has prompted them to reconsider the size of their future needs. Indeed, many are selling sites to raise cash and bolster their balance sheets, which has dramatically increased the supply of land on the market, further depressing values.

‘There is evidence that many other vendors have not yet come to terms with the changed market conditions, and have unrealistic expectations of what price their site can achieve, particularly if it was bought at the top of the market.”

At the moment, only well-located “oven-ready” plots with planning permission attract interest, but much of the available land does not fit this description. As a result, any offers are likely to include deferred terms and options.

Although developers and housebuilders now account for 29% of vendors, government agencies and local councils remain the largest source of supply, providing 31% of the market.

The index also highlights the important role of the Housing Association sector during the current downturn. Outside the capital, they now represent 30% of all acquisition activity – compared to just 16% for private sector developers.

Speculators are also an increasing feature of the market, representing 21% of buyers nationally. In London, where development sites have always been in short supply, they represent almost 50% of the marketplace.  They are clearly seeking bargains from the current spate of ‘forced sales’, expecting land to rise in value in the longer term, as housing remains in short supply in the UK.

Neale added: ‘The lack of activity among housebuilders is exacerbating the undersupply problem that still faces the UK, despite the downturn in the sales market. In the long-term, this will create a strong demand for new build property. Meanwhile, there are still insufficient development sites to cater for this long-term housing need, particularly in London.

‘It is unsurprising, that speculators are already active in the market. However, there are a larger number of cash-rich players who have yet to enter the fray, although they are watching prices very carefully. The ongoing financial crisis and uncertainty over the prospects for British economy over the next year suggest that values will continue to fall.

‘Values are likely to continue to fall, albeit at a lower rate of around 10% over the next twelve months. The regions that have suffered the earliest and most dramatic falls, such as Yorkshire and Humberside, may be among the first to see recovery.’