Housebuilders are deferring land payments and becoming more selective with land and payment structures amid the inflationary environment with high build and labour costs.
Knight Frank’s Residential Development Land Index report, which surveyed 41 volume and SME housebuilders across the UK, found 73% are looking to defer payments for land.
Two-thirds of those surveyed said they are seeking to defer more than 40% of purchases. In total, 70% are aiming to delay payments over a one-to-three-year time period.
However, 67% of housebuilders have no plans to slow down on land acquisition this year compared with 2022.
While the larger players are being highly selective of land acquisition, SME housebuilders are cutting profit margins to compete for land.
More than half of SME respondents, those building up to 100 homes in their region, said they cut their profit margins when bidding for plots of land in Q1 2023, whereas 60% of those building upwards of 100 homes said they either increased their profit margins or made no change to them.
With the end of Help to Buy, which officially closed to new applications in October 2022, a third of respondents said they are seeking partnerships or bulk sales deals with institutional investors in the private rental sector this year.
Looking ahead, a third of respondents also think mortgage availability and cost will be a key challenge for the sector over the next few months.
Lenders approved 43,500 mortgages for house purchases in February 2023, the first monthly increase since August 2022, but still well below the pre-pandemic average of about 66,000, according to the Office for National Statistics.
Knight Frank’s report also found that UK greenfield and urban brownfield values fell on average by 3% and 4.6% in Q1 2023.
However, in Q1 2022, brownfield land prices rose by 0.4% and greenfield land prices strengthened by 5%.
Prime central London bucked the trend where an ongoing lack of sites for sale and a rise in cash buyers supported land values which were flat on a quarterly basis and flat annually. Comparatively in Q1 2022, land prices in prime central London were up by 2.5% on a quarterly and annual basis.
The survey also found fewer housebuilders were impacted by build costs in Q1 2023 – 48% of respondents reported a “significant” impact, down from 60% in Q4 2022.
Overall, the Build Cost Information Service is forecasting build costs to increase by 4.2% this year, down from a jump of 11.6% in 2022.
Knight Frank also found 85% of respondents cited planning delays as the greatest challenge for their business in Q1 2023, up from 73% in Q4 2022.
Following the number of housing projects granted permissions falling to a record low in Q4 2022 to below 3,000, according to the latest Housing Pipeline Report from the Housing Builders Federation, volume housebuilders are in the market for land at all stages of the planning process, including strategic land.
More than 60% of SME housebuilders said they were looking for land to be purchased subject to planning.
So far, 55 local authorities have withdrawn or paused their housing delivery plans, including 17 since Michael Gove announced plans to abandon mandatory housing targets late last year.
Tight land supply was cited by respondents as the second most challenging factor for the sector this quarter, lending some support to values.
Overall, 65% of respondents expect that land values will hold steady in Q2 2023. Previously, just over half had expected values to fall in Q1 2023.
The report said: “Well-located sites will remain in demand given the constraints of supply and worsening planning delays, but activity will remain subdued given the ongoing economic uncertainty.”
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