Land supply must increase signficantly to meet government’s 1.5m homes target, says Savills

Savills’ quarterly analysis of the development market has indicated that confidence in the residential land market remains strong, but land supply will need to increase significantly to meet the government’s target to build 1.5 million homes over the next five years.

A report by Savills found that compared to the first quarter of this year, greater stability in the economy and housing market has supported the increase in confidence in the land market, despite a shrinking development pipeline.

However, despite the appetite for land among major housebuilders, partnership developers and privately funded developers, land sales in the first half of 2024 were 21% below the three-year average.

Lydia McLaren, research analyst at Savills, said that while land sales “remain muted”, “an increase in the number of bid levels over the last quarter has been noticed, particularly for optimum-sized sites in primary greenfield locations”.

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McLaren added that “A lack of new land supply remains a fundamental challenge. Planning consents fell to an estimated 237,000 homes in the year to Q1 2024 according to the Home Builders Federation. This represents the first time that planning consents have fallen below completions since 2008/09, indicating that we have a shrinking development pipeline”.

In addition, she said that “land deals are taking much longer to progress than in 2021/22. This is the result of multiple factors including board approvals for bids taking longer, significant variation in bid levels for sites, more complicated drawn out payment terms and a lack of urgency amongst some players to commit to land deals. In some cases, the inability to secure a Section 106 partner on sites is also causing a considerable slowdown in deals progressing.”

In regard to high-density flat-led schemes in urban locations, McLaren noted that significant challenges remain “due to the higher risk profile and additional build costs required to deliver these schemes, alongside higher costs of debt and less confidence in future viability.”

Patrick Eve, head of UK regional development at Savills, said: “The new Government has plans to build 1.5 million homes over the next five years. To do this, supply will need to increase significantly, and we will need market demand to support the sale of new homes alongside other tenures. How fast the land supply comes forward compared to market demand for homes will dictate the future for development land values.

“Whilst land supply is limited, land values will remain resilient. But if supply increases faster than market demand, we could expect greater transaction volumes in the land market and downward pressures on land prices. As this has not happened yet, it is unlikely in the short term, therefore the current resilience in greenfield land values is likely to continue due to the shortage of supply.

Eve added that “the market for urban sites is likely to remain challenged until viability improves. In the short term, local authorities will also need to adapt and offer greater flexibility within Section 106 agreements to avoid the contraction in demand for Section 106 having a prolonged impact on housing supply.”