The challenge of viability and volume

New-build housing transactions were hard hit in 2008 and 2009, peaking at 52% below levels of 2006 and 2007 as buyers sat on their hands, unable or unwilling to move.

This lack of transactional activity also had an impact on the new development market, particularly in terms of stock appealing to first-time buyers and investors pre the downturn. These buyers in particular have been hardest hit by a tightening of lending criteria.

In many cases, developers with stock under construction have become ‘forced sellers’, which has eroded the new-build premiums which existed pre-downturn on all but the best new-build schemes (See Graph 1).

Short-lived discounts

The premium, which averaged 15% by the end of 2006, had fallen to a new-build discount of -8% by the end of 2009. The talk, however, of an ongoing legacy of thousands of unsold new-build properties has proved unfounded.

Schemes were put on hold and those already being marketed either found buyers or were absorbed into the rental market. Although there were headline-grabbing discounts, this was the exception rather than the norm and by mid 2009 speculators looking for heavily discounted new-build stock were disappointed.

Instead, an influx of cash buyers combined with a pent-up demand led to the beginning of a recovery in sales for both new and second-hand property, particularly within the South of England. Today new-build flats and houses are selling again with properties in well-established areas appealing to owner-occupiers, ‘the bank of Mum and Dad’ and some cash-rich investment buyers.

The land market

One of the biggest casualties of the downturn was the development land market. Doubts over the availability of finance, achievable pricing, a sustainable rate of sale, infrastructure burdens and other planning obligations led to land value falls of in excess of -51.4% off peak (Sept 07) for greenfield land and -56% for urban land (Sept 04). For many sites already challenged on viability, site appraisals were creating zero or negative land values.

Despite this, although there were some land sales by distressed landowners and lenders releasing sites onto the market, this rapid drop in land values effectively stalled the land trading market. Landowners unwilling to trade at these levels and those speculating on land purchases were having difficulty finding sites to purchase.

So far this year, land transactions have improved, with prices for smaller more ‘oven ready’ development plots seeing more marked increases in value than larger bulk land purchases. Looking ahead we expect these serviced plots to outperform.

This presents landowners with an opportunity to package up larger sites to appeal to developers and satisfy the more risk-averse lending criteria as the market recovers.

Implications for the future

With many developers and funders hit hard by the downturn we are likely to see a change in the approach to development in the future. Already the smaller, less cash-intensive sites have become the most attractive option for many developers and housebuilders, and indeed for those funding the development.

Many of these schemes will be houses rather than apartments, although there will always be  a place for flatted development in areas with good levels of demand. Undoubtedly, more phaseable schemes will still attract interest, although the scale of some developments in the pipeline may prove difficult for funders to stomach.

While prospects for smaller sites in higher demand areas remain positive both in terms of viability and land values, issues do arise on some of the larger sites, particularly those located in lower value regeneration areas.

With high levels of upfront costs and rates of sale which dictate a longer build-out, finding funding for such a scheme may prove difficult as the payback period may be in excess of  25 years. A change of approach on the large sites will undoubtedly be needed, but this will take time, meaning further delays on many schemes already mothballed during the downturn.