Over the past year following the September 2022 ‘Mini Budget’, the transactional land market has continued to display some hesitance, relative to the buoyancy seen in 2021, with some of the larger developers taking a ‘wait and see’ approach to land acquisition. Changing government policies, increasing interest rates and further build cost inflation have played significant roles in fostering the atmosphere, resulting in reduced transactional activity.
Sales Rates
One of the most significant trends in 2023 has been the slowdown in new build sales rates. Several factors have contributed including economic uncertainty, higher mortgage costs and a more cautious consumer sentiment. In their half year results up to July 2023, Persimmon reported a net private sales rate of 0.59 per outlet, down from 0.91 in the same period in 2022. Bellway, Taylor Wimpey, Barratt and Crest Nicholson all report similar reductions. According to the RICS Residential Market Survey, buyer demand is down -39% and agreed sales are down -37%. Though in negative territory, these levels are an improvement on the previous survey in August where both buyer demand and agreed sales sat at a -46%. Looking ahead, the sales expectations over the next 12 months returned a net balance of +3%, up from -5% seen in the previous period. The rental market on the other hand is showing strength, propped up by a lack of supply. As reported by the Zoopla Rental Market Report, rents for new lets are up 10.5% on the year.
House Prices
After 14-consecutive increases in interest rates, initiated by the Bank of England in response to inflationary pressures, September saw the UK interest rate remain at 5.25%. The consistent raising of the cost of borrowing for both developers and potential homeowners has placed pressure on housing affordability, contributing heavily towards the sales slowdown and in turn the reduction in house prices. In the year up to September, the Nationwide House Price Index reports a negative annual house price growth of -5.3%. However, there may be light on the horizon. After interest rates were held in place, house price growth stabilised at 0.0% between August-September. This may be indicative of the wider housing market beginning to turn after previously seeing a -0.8% change from July-August.
Market Trends
Housebuilder activity has been mixed in the past year. SME developers have shown activity, with significant competition for small to medium consented schemes in the range of 20-100 units. Higher value small to medium consented sites have been in particular demand, with a target demographic less likely to feel the full sting of the cost-of-living crisis. In contrast, larger housebuilders have faced challenges due to their exposure to a wider range of markets. To reduce their exposure, they are more commonly exploring introducing Build-to-Rent, and additionality units to the affordable elements of their schemes.
Demand for longer-term strategic opportunities remains strong, with planning delays continuing to limit the supply of residential development sites. Nutrient neutrality in particular remains a challenge within the planning system in certain areas, with the House of Lords rejecting the government’s proposed reforms to the Levelling Up and Regeneration Bill in September thereby keeping circa 100,000 homes in limbo.
What next?
The UK residential development market is navigating through a period of change. The slowdown in new build sales rates and increased interest rates have created market headwinds. If new build sales rates and house prices continue to trend in a positive direction however, we expect land activity to increase moving into 2024. Areas such as the Oxford-Cambridge Corridor will continue to achieve strong values, where the restricted supply of land will drive competition.
While challenges remain, the market is active and there is hope that government initiatives to ease nutrient neutrality concerns in certain areas will open up a number of enticing opportunities. The market's ability to adapt and innovate, alongside inflation beginning to plateau and interest rates being held firm, will be key to it moving in the right direction in the coming year.
