HOUSEBUILDING REPORT 2018

[Pages:8]RESIDENTIAL RESEARCH

HOUSEBUILDING

REPORT 2018

HOUSEEXBCULIUL2DS0EI1VR8ESURVEY

HOUSING SUPPLY

POLICY DEVELOPMENTS

SECTOR OUTLOOK

KEY SURVEY FINDINGS

It is achievable to build 200,000 - 250,000 net additional homes each year, according to 61% of respondents. Just 1% say it's possible to surpass 300,000 by 2022.

The large majority of volume housebuilders plan to increase construction starts this year. Most small developers intend to decrease activity or leave output unchanged.

Half of respondents say the Help to Buy Equity Loan Scheme should end via a tapered withdrawal starting in 2021.

Planning remains the main barrier to speeding up housing delivery, respondents say, although the proportion identifying the planning system as a hurdle has fallen since last year.

Respondents said outer London, the South East and the West Midlands present the greatest opportunities for housebuilders during the next three years.

MARKET UPDATE

The Housebuilder Survey examines the opportunities and challenges ahead for the development sector. It comes at a febrile time for housing policy, and also as the trends for price growth across the country are changing.

The housebuilding industry has responded strongly to the demand for new housing, increasing output by 55% over the last five years. Our annual survey aims to give a snapshot of where the sector is now, and where future opportunities and hurdles lie.

It reflects the views of respondents from more than 100 housebuilders and developers, ranging from FTSE100 companies to firms building fewer than 10 homes a year. Together, the respondents account for almost three quarters of all homes built across the country each year.

The survey comes at a key time for housing policy, with another new housing minister (FIG1) and a raft of consultations and new rules set to be introduced in the coming year (see timeline on page 6). Many of these changes, especially those that focus on providing infrastructure, amenities and Affordable Homes, will be welcomed, however the policy overhaul comes at a time of wider political and economic uncertainty.

In terms of house prices, the picture across the UK is changing, with a more evenlyspread rate of growth across the country, in contrast to growth being concentrated in

London and the South East, as has been the case in recent years. This more fully reflects the economic recovery seen outside London, especially in major cities. In fact, official government data shows that housing starts over the last 18 months in Manchester and Birmingham reached highs not seen since before the global financial crisis.

Housebuilders are generally upbeat about the opportunities to build more in the coming years, according to our survey, although the majority feel that meeting the 300,000 target every year will be a stretch.

An increasingly diverse array of tenures now play a vital role in satisfying housing demand, particularly the build-to-rent sector across cities and town centres. There are also increasing opportunities across the sector for joint ventures, working with Registered Providers and Local Councils to provide new homes. As is clear from the survey, alternative methods of construction are also set to have an impact on the sector.

As for future opportunities, housebuilders have their eyes on most parts of the country ? as shown in the map on 8.

FIGURE 1

UK housing transactions and policy changes

2007-2018

Housing Ministers:

175000

150000

125000

100000

Yvette Caroline Margaret John

Cooper

Flint Beckett Healey

Grant Shapps

Mark Prisk

Kris Hopkins

Brandon Lewis

Financial Crisis

Help to Buy Equity loan

Help to Buy London launched

launched

Stamp duty reformed,

Stamp Duty hol ends

rates rise to 12%

Help to Buy

above ?1.5m

Stamp Duty holiday

Stamp Duty rises to 5%

Stamp Duty raised to 7% for ?2m+

Mortgage Guarantee launched

up to ?175,000

?1m+ NewBuy Guarantee

launched

Gavin Alok Dominic Barwell Sharma Raab

Stamp duty abolished for FTBs up to ?300k

2017 General Election

Monthly transactions (E&W) Number

75000

50000

25000

2007

2008

Source: Knight Frank Research/HMRC

General Election

FTBs Stamp Duty hol up to ?250,000

FTBs Stamp Duty hol ends

Scottish Referendum

General Election

Funding for Lending starts

3% Stamp Duty surcharge for

additional properties

Housing White Paper

Vote to leave EU

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

FTB = First-time buyer otice at the end of this report

2

Please refer to the important notice at the end of this report

HOUSEBUILDING 2018

RESIDENTIAL RESEARCH

Supply

In 2013, Mark Prisk, the then housing minister, lamented the UK's undersupply of housing and pledged to accelerate building to the fastest rate in more than 20 years.

At the time, housebuilding was in the depths of the post-crisis trough, with just 120,000 new homes being built every year. Hitting 180,000 completions seemed a stretch. However, in the five years since Mr Prisk's remarks, new-build completions have climbed steadily, rising by 55%.

Taking into account conversions and change of use, such as permitted development rights (PDR) ? transforming commercial space into homes ? the number of dwellings added during 2016-17 stood at 217,350.

Much of the increase can be attributed to an improving economic picture, though continued support for Help to Buy has enabled some buyers to circumvent the `deposit gap' when buying a home, thereby underpinning confidence among developers to commit to large schemes.

But there is more to do. Ministers are targeting 300,000 additional homes a year by the middle of the next decade ? a 38% increase from current levels. Delivery looks set to climb in the short term, and the Office for Budget Responsibility (OBR) has forecast net additions will reach 257,600 this year. Maintaining these levels of housebuilding will be a challenge however. The OBR is forecasting net additional dwellings will plateau at about 240,000 between 2020 and 2023 (FIG 2).

Responses from the housebuilder survey echo this outlook. Some 61% of respondents said between 200,000 and 250,000 net additional homes are achievable and sustainable by 2022, should current market conditions persist.

A quarter believe net supply will be fewer than 200,000, and 13% said levels would reach 250,000-300,000. Only 1% of respondents thought more than 300,000 was achievable by 2022 (FIG 3).

Developers, housing associations and local authorities in England started 163,000 homes in 2016/17 (FIG 4). In terms of their

FIGURE 3

What levels of net supply of housing do you believe will be achievable and sustainable in England on an annual basis by 2022, under current market conditions?

1%

13%

300,000+ 250,000300,000

61%

200,000250,000

25%

Fewer than 200,000

Source: Knight Frank Housebuilder Survey

FIGURE 2

Housing supply

Net additional dwellings, England

300,000 250,000 200,000 150,000 100,000 50,000

0 -50,000

New build completions Demolitions

Net conversions Adjustment to Census 2011

Net change of use Net other gains

Net additional dwellings OBR Forecast

OBR FORECASTS

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23

Source: Knight Frank Research/MHCLG

3

1970-71 1971-72 1972-73 1973-74 1974-75 1975-76 1976-77 1977-78 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

FIGURE 4

New-build housing starts, England

350,000 300,000 250,000

Private enterprise

200,000 150,000 100,000 50,000

0

Housing Association

Local Authorities

Source: Knight Frank Research/DCLG

own businesses, 61% of survey respondents said they expected to increase the number of units started during the next 12 months, compared to the previous 12, but that headline figure hides a split between the outlook of larger housebuilders and SMEs.

In recent decades housing supply has become more dependent on a small number of very large developers and, despite an increasingly favourable policy environment for SMEs, responses to the survey suggest most plan to build the same amount of homes or fewer over the coming 12 months.

Developers that build more than 1,000 homes every year overwhelmingly suggested they would be ramping up production during the coming year, with 92% stating that intended to increase starts (FIG 5).

Among developers that produce 100 homes a year or fewer, 43% said they would increase starts during the coming year, while 31% said they would leave production unchanged and 26% said they would start fewer homes.

FIGURE 5

In terms of the activity of your business over the next 12 months, compared to 2017/18, you expect start volumes to...

MODULAR

Modular construction has long been hailed as a potential game changer that may help the industry get closer to reaching the government's ambitious construction targets. Impetus on the sector has been further renewed in the past two years prompted by fears of a shortage of skilled construction workers due to Brexit and an aging workforce, and the rising costs of traditional building materials, particularly bricks.

Respondents to the survey were sceptical about the impact modular construction could have on supply in the short-term. Half expected the industry to "moderately" contribute to overall supply, while 43% said it would have no impact on supply at all.

However, the picture changes dramatically when respondents considered the opportunities over the longer term. Nearly nine in ten respondents said it would boost supply in five years' time, with more than a quarter saying it would have a significant impact (FIG 6).

FIGURE 6

What impact do you think modular or pre-manufactured housing will have on supply?

Significantly Moderately No Impact Increase Increase

IN THE NEAR FUTURE (1-2 YEARS)?

8%

REMAIN UNCHANGED

DEVELOPERS OF 1000+ UNITS PER ANNUM

92%

INCREASE

DEVELOPERS OF FEWER THAN 100 UNITS PER ANNUM

IN THE LONG TERM (5 YEARS+)?

26%

DECREASE

31%

REMAIN UNCHANGED

Source: Knight Frank Housebuilder Survey

43%

INCREASE

4

HOUSEBUILDING 2018

RESIDENTIAL RESEARCH

Affordable Housing

Delivery of Affordable Housing has grown in assessments in the decision-making stage

Several build-to-rent developers said

importance both politically and economically of development.

regional governments would need to be

as affordability constraints have tightened, particularly in large cities. The number of Affordable Homes built in England in 2015-16 fell to its lowest level in 24 years amid rising private new build completions, before partially recovering to 41,530 the following year (FIG 7).

Unsurprisingly, responses to our survey tallied closely with developer's outlook for private housing starts with 92% of large developers (1000+ units) stating they expected delivery of Affordable Homes to

The majority of respondents to the survey, at (55%), said the Mayor's approach could, if applied on a national basis, hinder the delivery of Affordable Homes. Respondents suggested any threshold would need to be set locally, allowing some flexibility where needed, otherwise there was a risk that the overall delivery of Affordable Homes could decrease. Many respondents said it was important that the system maintained some option to negotiate.

flexible if they hoped to attract a diverse range of tenures. (FIG 8).

We also asked whether developers favoured this threshold approach to Affordable Housing provided the target was set clearly and adhered to. Interestingly, this time most respondents, at 62%, agreed, with many favouring that approach due to its transparency, and the likelihood it would make bidding for land more competitive.

rise during the coming year.

Of developers building 100 homes or fewer, 26% said they expected Affordable Housing

FIGURE 7

Changing mix of Affordable Housing completions

delivery to increase, with 54% expecting it to 80,000 remain unchanged.

70,000

Social Rent

Affordable Rent

Intermediate Rent

Affordable Home Ownership

Shared ownership

The government and the Greater London

60,000

Authority have sought to increase delivery

by making policy changes aimed at reducing 50,000

the use of viability assessments. In London, Mayor Sadiq Khan introduced a threshold of 40,000

35% Affordable Homes that would enable

30,000

developers to fast-track through the planning

system. The intention is to give clarity to

20,000

developLeOrsNoDveOr wNhaMt thAeYyOcoRuldSpAaDy fIoQr KHAN HAS 10,000 LAUNCHED A "FAST-TRACK" THROUGH PLANNING

land, while simpFlOifyRingSaCndHsEpeMedEinSg TupHtAheT

development process.

MEET

A 0

35%

THRESHOLD

OF

AFFORDABLE

HOMES.

1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17P

you thinTkhethdriasft rtehvirseedsNhPoPlFdhaaspfopllorwoeadcsuhit,taondplanning,

Do you favour a threshold approach to

applied oisnseaekinngattoimoonvaelawbaaysfriosm,vciaobiulityld resultSionurcaen: Knight Frank Research/MHCLAG.fPfo= prrdovaisibonlael Housing, provided the target is set

ncrease in the delivery of affordable homes?

clearly and adhered to?

S3L5A%UNTCHHREEDSFIHGAOU"RLFEADS8OT-FTARFALFCOOKRN"DTDAHBFORLOONEUR"HGM3OH5SAM%CPYELoHSOAn.ENRsMNiteISNEiGsASDTIQHAKTHMANEEHTAAS3L5A%UNTCHHREEDSHAO"LFADSOT-FTARFAFLCOOKNR"DDFOTOANHRBRMSLOACEYHUOEHGRMOHSEAMSPDTEILQHSAAK.TNHMANNEINEHTGAAS3L5A%UNTCHHREEDSHAO"LFADSOT-FT

unsustainable vs the

a?nnDg,iof aypopulitehdinoknAtfhfaoDirsndoaatybhotlieuroecHfnasloevahcuaolosrouslbiytrnltdoahgaafe,nstpaplhduaisrprnacoed,phdsv.a"cihhrdsoeooienrlgdaduedcltadhphteopr?ttreaoorsagcpuehllttatisoninsneaitnng,

increase in the delivery of affordable homes?

5N5O% Y4E5S%62% aclear

hieve

YES 1 bids

itive."

"Provides uniformity and levels the the playing field for large and small housebuilders such as ourselves."

55%Y4E5S% e "fast-track" does

34 ot speed up the

lanning process

NO ficiently to make it

yan incentive for

45% developers."

"Everyone has a clear target to achieve

"35% on simteaiksing land bids unsustainablme ovsrethceompetitive." cost of purchasing

the land."

"Everyone has a clear

%

target to achieve making land bids

NO"It provides cemrtoarientcyompetitive."

to dev"eAlbolpanekrest,tahrseshold

wellal nadstihcsvheuanarvorlreautPmnrseLitaelAsoytnNi.onsaN"nimibIsNsloeGeiunwsnshtiteteons

"The "fast-track" does

YES

between 10% and 50%."

62% D"iPofirnaoycpvoirpdueelaistehsAudeinnfoiikffnonortDtmharhidioestnyaatdayhtbneiorodlelineuvsaehlrHfoyablodaovsfuoaiaspsuf,pifrconroorgadau,acltdbhphlretrreooeshpusvollmihtadnioenenslaid?dnngta,hpeptraoragceht tisoAsf levels the the playing clearly and adhered to?

field for large and small

housebuilders such as ourselves."

YES "35% on site is

unsustainable vs the cost of purchasing

the land."

"Provid

level

55% "Provides uniformity and

NO levels the the playing

field for large and small

346%2% "Everyone has a clear target to achieve making land bids more competitive."

field fo hou as

housebuilders such

45 NOYES as ourselves."

%

"The "fast-track" does not speed up the planning process

sufficiently to make it an incentive for developers."

YES

"A blanket threshold is not sensible when the variations in sites "wItteopllrdoaevsvidehelaosrpmceeorcrsntu,aiasirsnebrsteeyntwtleyeanm1o0u%nt to

3N4O% land values." and 50%."

not speed up the S SHOWNpARlaE EnXnAMinPLgE RpErSoPOcNeSsESsFROM SURVEY

sufficiently to make it an incentive for

devTehloepe"rfsa."st-track" does

QUOTES SHOWN ARE EXAMPLE RESPONSES FROM SURVEY

"It provides certainty

to developers,as well as harmonises

land values."

The "fast-track" does not speed up the planning process

QUOTES SH"OAWNbAlRaEnEkXAeMtPLtEhRrEeSsPOhNoSlEdS FR is not sensible when the variations in sites currently5amount to between 10%

FIGURE 9

The Help to Buy Equity Loan ends in 2021 and, if current market conditions persist, how will this affect the number of homes your business delivers?

SIGNIFICANT INCREASE 2%

MODERATE INCREASE 5%

SIGNIFICANT DECREASE 20%

MODERATE DECREASE 26%

REMAIN UNCHANGED 47%

Policy

There have been myriad policy announcements and consultations over the last few years around housebuilding, starting with the publication of the Housing White Paper in February 2017, and including an announcement of a Social Housing Green Paper, a draft revised National Planning Policy Framework, a new draft London plan and a review into UK housebuilding by Sir Oliver Letwin MP.

The results of these different approaches will emerge over the rest of 2018, but perhaps a key policy decision for housebuilders is Help to Buy, and what will happen to the Equity Loan scheme designed to help buyers bridge the `deposit gap' after it is slated to end in 2021. Since the scheme was introduced in 2013, around 160,000 home buyers have taken out an Equity Loan, with around 80% of these being first-time buyers.

Help to Buy

Nearly half of respondents (46%) said ending the scheme in 2021 would have a negative impact on the supply of homes they were able to deliver, while 47% said that it would have no impact (FIG 9).

More large developers say that the end of the scheme will affect output, with some 85% of developers who deliver 500+ homes a year saying that supply will fall modestly or significantly. In contrast, some 20% of developers delivering up to 100 units a year say that their production levels will fall, with two-thirds (65%) saying their output will remain the same.

FIGURE 11

What do you think should happen to the Help to Buy Equity Loan scheme after 2021?

FIGURE 10

What are the key barriers to speeding up delivery?

12345678

50%

THERE SHOULD BE A PHASED TRANSITION IN PLACE, WITH A VIEW TO ENDING THE SCHEME EVENTUALLY

36%

THE SCHEME SHOULD CONTINUE INDEFINITELY

PLANNING

LABOUR ACCESS TO ABSORPTION LIMITED ACCESS TO

AVAILABILITY DEVELOPMENT RATES

LOCAL MATERIALS

FINANCE

INFRASTRUCTURE

SITE

LAND

LOGISTICS REMEDIATION

DIFFICULTIES

14%

THE HELP TO BUY EQUITY LOAN

SCHEME SHOULD END IN 2021

CONSULTATIONS AND POLICY DEVELOPMENTS

FIGURE 13

Fixing Our Broken Housing Market (White Paper) CONSULTATION OPENS

FEBRUARY

Planning for the right homes in the right places CONSULTATION OPENS

Social Housing Green Paper announced

SEPTEMBER

Draft new London Plan CONSULTATION OPENS Letwin Review announced

NOVEMBER

MHCLG created, Dominic Raab becomes

Housing Minister

Revised draft National Planning Policy Framework CONSULTATION OPENS

Supported housing delivery through developer contributions

CONSULTATION OPENS

Letwin Review terms of reference published

James Brokenshire becomes Secretary of State

for Housing Communities and Local Govt

JANUARY

MARCH

APRIL

2017

2017

2017

2018

2018

2018

6

HOUSEBUILDING 2018

RESIDENTIAL RESEARCH

1.

The expectation that ending the Help to Buy Equity Loan could affect delivery does not simply translate into a plea for Help to Buy to continue, however. Just over a third of all respondents (36%) to our survey said that the scheme should continue indefinitely (FIG 11). Two-thirds of respondents said the scheme should end, although these were split between those who called for a tapered withdrawal of the scheme (50%) and those who said

2. 3. 1. it should end completely at some point in

2021 (14%).

Another announcement expected towards the end of the year is the plan drawn up by Sir Oliver Letwin aimed at increasing the speed of housebuilding. His independent review of build out rates was announced at the Autumn Budget in 2017. Since then he

1. has made an an initial report and published

his draft analysis, in which he explains that there will be a focus on encouraging a range of housing design as well as tenures on

2. sites. While the Letwin Review focuses on

challenges after the planning process is

2. complete, when asked about the barriers to

speeding up development, our respondents

still identified3p. lAanCnCinEgSiSssTueOs as the biggest hisusrudele(F, wIGith103)9. %MAidTeEnRtifIyAinLgSit as the top

UNCERTAIN ECONOMY

However, it is worth noting that in previous

Whatever ministers decide, years, a much larger proportion of

they must speak up LABOUR ACCESS TO

AVAILABILITY MATERIALS

respondents identified planning as a barrier

UNCERTAIN ECONOMY

to aAcVtLAivAILiBtAyOB,UILsRIuTgYgestAMinCAgCTEEtShRSaIAtTLtOShe planning

soon if they are to avoid

landscape, while still challenging, may

be easing.

weighing on the supply of

homes. The industry has shown itself capable of adapting to change, but

businesses in every sector strain to operate amid policy uncertainty."

The future

The performance of the UK property market has shifted during the past 12 months. The north/south divide in terms of house price performance has narrowed, with mainstream markets across the Midlands, South West and Scotland outperforming.

Some of these shifts have been

JUSTIN GAZE HEAD OF RESIDENTIAL DEVELOPMENT LAND,

KNIGHT FRANK, ON THE FUTURE OF HELP TO BUY

exacerbated by tax changes. Successive changes to stamp duty, for example, have resulted in a significant decline in new projects starting in inner London, since a

2015 peak.

We asked our respondents to list the regions in which they saw the greatest opportunity to

FIGURE 12

What do you perceive are the biggest risks to your business from Brexit?

1. UNCERTAIN ECONOMY

2. LABOUR AVAILABILITY

3. ACCESS TO MATERIALS

their business during the next three years. The South East, London zones 3-6 and the West Midlands were picked as the top three hotspots (FIG 14). Among the volume builders (1000+ units) the South East and West Midlands were picked as the most significant opportunity areas in the coming years. Respondents to the survey were asked for their opinions on Brexit. The majority said that an uncertain economy was the greatest risk of the process of the UK leaving the EU. This was followed by labour availability and then access to materials (FIG 12). London-focussed developers are likely to

1. UN EC

2. LA AV

3. AC M

Local Council Elections (inc. Mayoral elections in Hackney, Lewisham, Watford, Newham &

Tower Hamlets)

MAY

Letwin Review draft analysis published

JUNE

Revised NPPF due to come into force

JULY

Autumn Budget Letwin final

Review published

NOVEMBER

Social Housing Green Paper

due late 2018

Final London Plan published

Winter 2019/20

2018

2018

2018

2018

2018

2018

7

be disproportionately affected by labour availability because more than half of the capital's construction site workforce is from overseas.

In addition, many respondents suggested uncertainty over government. Developers in central London identified uncertainty in Westminster and currency fluctuations affecting investor appetite.

Nationwide, housebuilding looks set increase, particularly on the outskirts of London and across the Midlands, underpinned by more evenly distributed house price growth and high levels of employment in regional cities. However, as identified in the survey, the market is not without its challenges, and continued policy uncertainty has the potential to weigh on output in the coming years.

FIGURE 14

Regions identified by respondents as offering the greatest opportunities for their businesses during the next three years.

SCOTLAND

GREATEST OPPORTUNITY

NORTH WEST

NORTH EAST YORKSHIRE & THE HUMBER

EAST MIDLANDS

KNIGHT FRANK INTELLIGENCE

For the latest news, views and analysis on the world of prime property, visit blog

FOR RESEARCH ENQUIRIES Patrick Gower Associate +44 20 3640 7015 patrick.gower@ Gr?inne Gilmore Head of UK Residential Research +44 20 7861 5102 grainne.gilmore@

FOR DEVELOPMENT ENQUIRIES Justin Gaze Head of Residential Development Land +44 20 7861 5407 justin.gaze@ David Fenton Partner, Office Head +44 1789 206964 david.fenton@

With thanks to Hayfield Homes for the front page image, showing Hayfield Chase, Stratford-Upon-Avon.

Thanks to the survey respondents for their time.

WEST MIDLANDS

WALES

EAST LONDON (ZONES 1-2) (ZONES 3-6)

SOUTH WEST SOUTH EAST

Knight Frank Research provides strategic advice, consultancy services and forecasting to a wide range of clients worldwide including developers, investors, funding organisations, corporate institutions and the public sector. All our clients recognise the need for expert independent advice customised to their specific needs.

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RESIDENTIAL RESEARCH

RESIDENTIAL DEVELOPMENT LAND INDEX

Key Facts Q1 2018 English greenfield land values climbed 0.9% during Q1 2018, taking the annual change to 2.2%

Urban brownfield land values rose 0.4%, taking the annual change to 6.4%

Land values in prime central London remained unchanged, taking the annual decline to 2.1%

ENGLISH GREENFIELD LAND PRICES EDGE UP IN Q1 2018

The value of English greenfield land climbed 0.9% between January and March, while land values in prime central London remained unchanged. The average value of urban brownfield land rose 0.4%.

Average greenfield land values in England climbed 0.9% during Q1 2018, aided by demand for oven-ready sites with access to infrastructure. This took the annual change to 2.2%, down from 2.6% in the year to Q4 2017.

Uncertainty over the future of Britain's relationship with the European Union is likely to weigh on future growth in values, with house builders taking an increasingly selective approach when bidding for land as they adjust to perceived risk in the market.

The Help to Buy Equity Loan scheme has continued to contribute to sales rates, though developers are now embarking on projects due to complete after 2021 ? when the scheme is currently stated to end. Uncertainty over the future of the policy is likely to be reflected in English greenfield land values in the coming quarters, coupled with house builders factoring into their margins the unclear economic picture ahead.

Growth in urban brownfield land values moderated during the quarter, climbing 0.4%. This follows a strong final quarter of 2017, when values rose 4.9%, amid positive sentiment and robust employment growth in the UK's major cities ? particularly in Birmingham. Values have climbed 6.4% during the past twelve months.

Those fundamentals that underpinned demand in Q4 remain unchanged. However, high build costs are increasingly limiting what developers are willing to pay for land.

Development land prices in prime central London remained unchanged during Q1 2018, taking the annual change to -2.1%.

Though trading volumes remain lower than in previous years, a number of large sites have been put on the market following the Christmas lull, which should provide a strong indication of the strength of the market, and whether larger developers are re-committing to Zones 1&2.

The GLA Affordable Housing policy ? allowing developers to fast-track through the process if they hit a threshold of 35% Affordable Housing, or 50% on public land ? is being digested by the market and the jury is out as to whether this will provide a much need boost to Affordable Housing in the capital. The spread of prices paid for land sold with planning, compared to land sold without, has widened as developers weigh up risk in a new planning environment.

We anticipate prime central London development land values will remain stable moving forward.

PATRICK GOWER Associate, Residential Research

Follow Patrick at @patrickgower

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FIGURE 1 Residential development land prices Rebased 100 = Jun 2011 (Urban Brownfield = Dec 2014)

Prime Central London English Greenfield 150

Urban Brownfield

140

130

Index

120

110

100

90

FIGURE 2 Annual change in average land values

15.0% 12.5% 10.0%

7.5% 5.0% 2.5% 0.0% -2.5% -5.0% -7.5% -10.0% -12.5%

Prime Central London English Greenfield

Urban Brownfield

Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18

Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

Source: Knight Frank Research

Source: Knight Frank Research

UK Res Dev Land Index - Q1 2018

RESIDENTIAL RESEARCH

LONDON DEVELOPMENT HOTSPOTS

RESIDENTIAL DEVELOPMENT OPPORTUNITY AREAS 2018

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RESIDENTIAL RESEARCH

UK RESIDENTIAL MARKET FORECAST

Headlines May 2018 UK house price growth has slowed from a peak reached three years ago, although the annual rate of change remains in positive territory

Price growth across the UK is expected to be 1% in 2018, and 14.2% cumulatively between 2018 and 2022

In London, price growth over the next five years is expected to be around 13%, although prices are forecast to dip this year

UK rental growth is expected to be 14% between 2018 and 2022

Methodology Statement: House price forecasts are based upon time series regression analysis of relevant statistically significant macro-economic variables adjusted in-house to encompass externalities such as likely risk factors. The forecast uses the Nationwide House Price Index as a base. Our forecasts assume a Brexit deal, but with a two year transitional period. Rental forecasts based on ONS IHPRP.

"The political and economic mood music of the residential market is a duet of Brexit and future montary tightening".

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UK HOUSE PRICE FORECAST

There are five main factors at play in the sales market at present.

First, the balance between buyer demand and the supply of homes being put up for sale, which differs across the country.

Certainly, the disconnect in some UK towns and cities between rising demand ? on the back of stronger economic growth ? and muted stock levels, is contributing to price growth.

Secondly, stamp duty remains a curb on transactions. However, in prime central London, some parts of the market are moving into positive price growth for the first time in nearly two years. The trend is becoming particularly apparent in areas where lower prices more fully reflect higher stamp duty charges.

On a more regional basis, the North/South divide in price growth has narrowed, with the Midlands, East of England and North West

seeing stronger growth and activity levels than the traditional property powerhouses of London and the South East, though large discrepancies in capital values remain.

The market's political and economic mood music is a duet of Brexit and future interest rate rises.

Brexit will continue to create uncertainty in the short-term. And while interest rate rises will push up mortgage rates, the rates payable on home loans will remain near historic lows in the short to medium-term.

Finally, and perhaps one of the biggest factors in the market at present are the growing affordability pressures in some parts of the country ? these will weigh on pricing.

In the lettings market, rental growth has been slowing for a year. However, as with the sales market, rental performance is dependent on the type of property, as well as its location.

2018-2022 Forecasts, May 2018

2018 Mainstream residential sales markets

UK

1.0%

London

-0.5%

North East

2.0%

North West

1.0%

Yorks & Humber

1.0%

East Midlands

2.0%

West Midlands

2.0%

East

2.0%

South East

0.0%

South West

1.0%

Wales

1.5%

Scotland

1.0%

2019

2.0% 2.5% 2.0% 2.0% 2.0% 2.5% 2.0% 3.0% 2.0% 2.0% 1.5% 1.0%

2020

3.0% 3.0% 4.0% 4.0% 3.0% 2.5% 3.0% 3.0% 3.0% 2.5% 2.5% 2.5%

2021

3.5% 3.5% 3.0% 4.0% 3.0% 3.0% 3.0% 4.0% 4.0% 3.5% 3.0% 3.5%

2022 2018 - 2022

4.0% 4.0% 3.0% 4.5% 3.0% 3.5% 4.0% 3.0% 4.5% 4.5% 4.0% 3.5%

14.2% 13.1% 14.8% 16.4% 12.6% 14.2% 14.8% 15.9% 14.2% 14.2% 13.1% 12.0%

Prime residential sales markets Prime central London East Prime central London West Prime outer London Prime England & Wales

0.5% 0.5% 0.0% 1.5%

1.5% 1.5% 1.0% 2.0%

2.5% 3.5% 3.0% 2.0%

3.0% 3.0% 3.5% 2.0%

5.0% 3.5% 4.5% 2.0%

13.1% 12.6% 12.5%

9.9%

Residential rental markets UK London Prime central London* Prime outer London*

2.5% 1.5% 0.5% -1.0%

2.5% 2.0% 1.5% 1.0%

2.5% 2.5% 2.5% 2.0%

3.0% 3.0% 3.0% 2.5%

3.0% 3.5% 3.0% 3.0%

14.0% 13.0% 11.0%

8.0%

Source: Knight Frank Research NB. Price forecasts are for existing homes. Property values in the new-build market may perform differently. *Based on Knight Frank indices and boundaries, existing homes only.

UK Housing Market Forecast - May 2018

Important Notice

? Knight Frank LLP 2018 ? This report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by Knight Frank LLP for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank LLP in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of Knight Frank LLP to the form and content within which it appears. Knight Frank LLP is a limited liability partnership registered in England with registered number OC305934. Our registered office is 55 Baker Street, London, W1U 8AN, where you may look at a list of members' names.

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