In an in-depth report commissioned by development lender Atelier, Dr Nicole Lux finds evidence that land values are falling and this decline may result in the Buy-to-Rent (BTR) and student accommodation sectors providing opportunities for SME developers.
Lux, senior research fellow at London’s Bayes Business School, finds that while challenges remain prevalent in the residential development sector, SME developers can still take advantage of the opportunities if they can find the right finance solution.
Atelier’s research shows that the BTR and student accommodation market are not only expanding but have also become firmly established as separate asset classes and offer significant opportunity with demand still outweighing supply.
As interest rates rise and the general cost of ownership rises with it, Atelier predicts an increase in homeowners selling their properties, which they expect will drive down the price of block sales and land. But that’s not all. According to Atelier, these lower prices could present a significant opportunity for SME developers and investors.
Declining Residential Land Values
Residential land values in the UK have started to experience a downward trend, with notable declines reported in the final quarter of 2022. According to leading property consultancy firm Knight Frank, both greenfield and urban brownfield land values saw average decreases of 3.5% and 8.5% respectively during this period. These figures contribute to an annual change of -1.3% and -9.2% for the year 2022.
This decline in land values can be attributed to various factors such as negative influences on sale prices, construction delays, rising mortgage costs, and increased energy bills.
In light of the declining land values, a silver lining emerges for prospective property developers.
As the market adjusts to a new clearing price, 2023 is expected to present favourable opportunities for land acquisition at significantly lower values compared to the levels seen in 2021 and 2022. This shift in the market dynamics opens doors for those seeking to invest in land for future development.
The next quarter is expected to bring about a noticeable change in the property development landscape, as the previously observed upward pressure on labour and material costs is likely to ease.
This shift comes as a relief for developers who have been grappling with rising expenses in recent times.
Atelier believes that both macroeconomic indicators and sector-wide trends indicate that the market has already passed its lowest point and is on the path to recovery. This optimistic outlook suggests that the trough has been reached, paving the way for a more favourable environment for property development.
The lender highlights economic outlook, asset class, scale, and location playing an important role in the cost and availability of finance and are factors developers should consider when deciding what to build.
This is where the finance provider expects there are opportunities to provide customised solutions to its clients.
What Atelier suggests.
Atelier recommends that developers acquire land or explore conversion and refurbishment projects at a discount to previous values. By repurposing these properties to cater to the growing demand for residential options, such as student accommodation or private rented sector (PRS) housing, developers can tap into a thriving market segment.
With a lack of potential homebuyers for flats or houses, the BTR market is predicted to grow further with good rental growth prospects.
Commenting on the report, Chris Gardner, joint CEO at Atelier, said: "With the property market, site values, and the cost of finance all going through a period of transition, SME developers — who together build half of the new homes delivered in Britain each year — are facing both challenges and opportunities.
"Over the past 18 months, the rapid increase in base rate, which in May reached its highest level for nearly 15 years, has led many owners to rethink their strategies, contributing to a surge in the number of motivated sellers and, in some cases, forced sellers.
"Our analysis reveals the market is now on the move in response, with an improved balance between buyers and sellers leading to a significant and long-awaited softening of site values.
“These movements could be the key to unlocking new opportunities and the delivery of much needed new housing."
You can list your current properties to students at accommodationforstudents.com.
