Land value growth remained strong in the first quarter of 2022 despite mounting build cost pressures.

In Q1, 2022 UK greenfield and urban values increased by 1.4% and 1.3% respectively, taking annual growth to 9.3% and 7.2%. This is in comparison to annual growth of 0.2% and 1.2% for UK greenfield and urban land in the year to Q1 2021, according to a new report by Savills.

The combination of high levels of demand and constrained land supply have maintained values as parties are still willing to bid competitively for sites in order to secure their pipelines.

Build cost inflation continues to serve as a downward pressure on land values – however its impact is relatively limited, offset by ongoing house price growth and the supply-demand imbalance.

The limited supply of land coming through the planning system is also driving intense competition for sites. Shortage of stock is further compounded by the 42 additional local authorities identified by Natural England as having to demonstrate nutrient neutrality on sties taking the total to 74 local authorities affected at present.

Patrick Eve, Savills head of regional development, said: “Demand for land remains exceptionally strong with competition for sites from a diverse range of players. There is limited acceptance for deferred payments on a lot of transactions that we are involved with as parties look to become more competitive through payment terms in addition to tightening margins.”

Major housebuilders continue to be the most competitive in the land market. Many still have surplus money to spend and require land to plug gaps in their immediate pipelines given that many sites are already significantly forward sold for FY 2022.

Smaller and medium sized players are more constrained by cost inflation, leading many to adopt a more cautious approach.

High levels of demand are further intensified by competition from alternative uses, representing a new dynamic in the residential land market.

Eve commented: “Demand from industrial and logistics developers is applying in more areas across the country, putting even more pressure on constrained residential land supply. Strong prices are being paid for industrial land for well-connected sites to major road network access and motorway junctions.”

He added: “Although the current land market remains buoyant, capacity for further growth is limited. Over the next five years we anticipate slowing growth in land values. Our research shows greenfield land value is forecast to grow by just 4.4% over the next five years after rising by almost 10% in the last year alone.”

Land values in London continue to face downward pressure from increasing build costs and lower affordable housing values. In the last six months there has been minimal change in residential land values in London. Central and outer London residential land values fell by 0.1% and 0.4% respectively in the six months to March 2022, taking the annual change to 0% in Central London and -1.2% in Outer London.

Lydia McLaren, Savills research analyst, said: “Landowner expectations remain high in London. As residential development in London faces numerous planning and viability challenges, many landowners are either not bringing sites forward or are considering alternative deal structures and competing commercial uses.”