Supporting Older

People Conference

Sponsored by:

Df

B9: Understanding land and land values

Speakers: Paul Tostevin Associate Residential Research, Savills

David Shelton Chairman Shelton Development Services

Chair: Jim Patman

Group Development Director East Midlands Housing Group

Residential Development

Land

Paul Tostevin, Savills Research 5 July 2013

Land market drivers: Residential market

Land market drivers: Development

Land market overview

Outlook

Residential Market Context

A polarised market

Transactions v

pre crunch

Prices v pre

crunch peak

London -36% 7%

South East -36% -8%

East -38% -10%

South West -35% -11%

West Midlands -45% -16%

East Midlands -43% -18%

Wales -43% -19%

Yorks & Humber -49% -21%

North West -53% -22%

North East -52% -26%

England & Wales -42% -11%

Land Registry (April 2013)

Stimulating the market

Funding for Lending

Help to Buy

£35bn of Equity Loans unlocking 75,000 sales

£12bn of Mortgage Guarantees: 320,000 sales

A £1bn Build to Rent fund

National Planning Policy Framework

Maybe, just maybe

Source: RICS

-70

-50

-30

-10

10

30

50

70

May-0

5

Sep-0

5

Jan-0

6

May-0

6

Sep-0

6

Jan-0

7

May-0

7

Sep-0

7

Jan-0

8

May-0

8

Sep-0

8

Jan-0

9

May-0

9

Sep-0

9

Jan-1

0

May-1

0

Sep-1

0

Jan-1

1

May-1

1

Sep-1

1

Jan-1

2

May-1

2

Sep-1

2

Jan-1

3

May-1

3

Difference Buyer Enquires New Supply

UK mainstream forecasts

5

years

to end

2012

2013 2014 2015 2016 2017

5

years

to end

2017

Current

-11% 0.5% 1.5% 2.0% 3.5% 3.5% 11.5%

Optimistic

-11% 0.5% 2.0% 3.5% 4.5% 3.5% 15.3%

Development

Market rate housing selling well:

larger house builders are selling faster

Source: Housebuilder Media

0

5

10

15

20

25

30

35

40

45

Crest

Nicholson

Barratt Linden

Homes

Redrow Taylor

Wimpey

Bovis Cala Galliford

Try

Miller

Sa

les p

er

ou

tle

t p

er

an

nu

m

2011 annual 2012 Annual 2013 Annual

And profits are up

Source: CLG, HBF

Estim

ate

-£100

£0

£100

£200

£300

£400

£500

-50,000

0

50,000

100,000

150,000

200,000

250,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Ave

rag

e g

ross p

rofit (m

illio

ns)

Nu

mb

er

of

un

its c

om

ple

ted

(G

B)

Private Enterprise Housing Associations Average Profit of Top 8 Housebuilders

Government intervention will support further

increases in market completions

Source: DCLG, Savills

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

20

11

-12

20

12

-13

20

13

-14

20

14

-15

20

15

-16

Ho

usin

g C

om

ple

tio

ns in

En

gla

nd

(a

ll te

nu

res)

Unsupported Volumes Previous Govermnent Support Schemes

HTB Equity Loan HTB Mortgage Guarantee

The new planning system is now starting to

provide more deliverable consents

Source: HBF, DCLG

New planning

consents

0

50

100

150

200

250

300

Ad

ditio

na

l ho

use

s/h

ou

se

ho

lds in

En

gla

nd

(00

0s p

er

an

nu

m)

New homes starts

Household projections

Private sector construction is expanding

Source: DCLG +Savills

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

New

Housin

g C

om

ple

tions i

n E

ngla

nd

Private Enterprise Private Completions Potential

But a massive supply gap will remain -

for others to fill with market rent and affordable

housing

Source: DCLG +Savills

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

New

Housin

g C

om

ple

tions i

n E

ngla

nd

Private Enterprise Housing Associations

Local Authorities Private Completions Potential

Affordable housing delivery

and Section 106

affordable housing is

being squeezed out by

viability

CIL will squeeze this

further

Source: Savills using DCLG and NAO data

0

10000

20000

30000

40000

50000

60000

Ne

w b

uild

aff

ord

ab

le h

om

es d

elive

ry

Other

NAHP numbers

NAO projection of

AHP numbers

All new build

affordable

Residential Development Land Market

UK Greenfield & Urban Land Value Index

Source: Savills Research

0

20

40

60

80

100

120

140

Q202

Q203

Q204

Q205

Q206

Q207

Q208

Q209

Q210

Q211

Q212

Q213

Index

Greenfield Urban

Residential Development Land,% off Peak

Greenfield Urban

All Regions -32% -53%

London -3%

South East -26% -45%

Western -28% -47%

Eastern -39% -60%

Scotland -41% -44%

Northern -58% -70%

Source: Savills Research

Readily developable sites drive demand

Urban Land

High density development (outside London)

Sites needing lots of remediation

Greenfield Land

Serviced sites

Permissioned Land

Smaller sites

Land deals are getting larger, as finance returns to the

market

Source: Savills Research

£0

£5

£10

£15

£20

£25

£30

2006 2007 2008 2009 2010 2011 2012

Ave

rag

e v

alu

e o

f la

nd

tra

nsa

cte

d (£

m)

Land availability and prices rising as a constraint

once again

Source: HBF

0

10

20

30

40

50

60

70

De

c 0

7

Ju

n 0

8

De

c 0

8

Ju

n 0

9

De

c 0

9

Ju

n 1

0

De

c 1

0

Ju

n 1

1

De

c 1

1

Ju

n 1

2

De

c 1

2% c

on

sid

eri

ng

fa

cto

r a

ma

jor

co

nstr

ain

t

(fo

ur

qu

art

er

rollin

g a

ve

rag

e)

Land availability Land prices

The market remains geographically polarised

Source: Savills Research

Savills Land deals in 2012

Source: Savills Research

Region Average £/plot

Greater London £407,332

South East £61,388

East Midlands £59,653

South West £57,919

West Midlands £41,049

East of England £37,981

Wales £32,045

Scotland £31,275

Land transactions in London, 12 months to Oct 2012

Source: Molior / Savills Research

Central London resi land values have surged since ‘09

Source: Savills Research

0

50

100

150

200

250

300

350

400

Mar

97

Mar

98

Mar

99

Mar

00

Mar

01

Mar

02

Mar

03

Mar

04

Mar

05

Mar

06

Mar

07

Mar

08

Mar

09

Mar

10

Mar

11

Mar

12

Mar

13

Index

Residential Office Hotel

Office to resi conversion viable in central London

Source: Savills Research

100 = Average

40

60

80

100

120

140

160

Mar

03

Mar

04

Mar

05

Mar

06

Mar

07

Mar

08

Mar

09

Mar

10

Mar

11

Mar

12

Mar

13

Index

Hotel Residential Office

Its not all about London...

Rank Town Region

1 Sevenoaks South East

2 Maidstone South East

3 Crawley South East

4 Exeter South West

5 Solihull West Midlands

6 Canterbury South East

7 Swansea Wales

8 Haywards Heath South East

9 Leamington Spa West Midlands

10 Edinburgh Scotland

Source: Savills Research

Strategic Sites: Capacity for over one million homes

Source: Savills Research

Placemaking, place management

& long term ownership

Streets, not architecture

Place-management

Value per hectare, not psf

Long-term income & growth

Buy-in / partnership with

landowners

Higher GDV per ha & rate of sale

+45%

+18%

+30%

Outlook

Greenfield development land forecasts

Source: Savills Research

20

40

60

80

100

120

Ind

ex

UK Serviced land

UK Serviced land forecast

Serviced land South East

SE forecast

Outlook

Housing high on political agenda

Public sector land

Housebuilders return to profit

Industry capacity

Land market polarised

Unlocking difficult sites

Slow but steady recovery

consultancy software

training

development

consultancy software

training

development

Understanding Land & Land Values

David Shelton

NHF Development Conference

July 2013

Understanding Land Values

• Public subsidy is set to fall further from £22k to £18k from 2015

• Greater levels of cross subsidy & internal subsidy required

• Developers being encouraged to do more speculative sales

Understanding Land Values

• Development for sale (of any kind) is very risky

• Private developers need to make a profit (in part) to cushion the risk

• Associations should either wait until profit is secured, or make contingency against the sales risk.

Understanding Land Values

• Traditional way for associations to be competitive is to reduce costs, increase subsidy, increase income (limited).

• But mix optimisation is a more powerful to tool to improve affordable land values

Understanding Land Values

• Mix optimisation exploits the differences between the value of a unit and its cost.

• Different unit types perform better than others – the result is not always intuitive

• Identify those units that perform the best

Understanding Land Values

Traditional Private Developer Residual Land Value Model

Residual Land Model

Sales Income

Less Costs

Less Profit

Equals Land Value

Private Sector Valuation Model

Residual Profit Model

Sales Income

Less Costs

Less Land Value

Equals Profit

Understanding Land Values

Sales Income £250,000

Cost to Build £120,000

Gross Profit £50,000 (20%)

Residual LV £80,000

Understanding Land Values

Traditional Social Housing Developer Model

Acquisition

Works

Fees Subsidy

Sales

Loan

TSC

TSC - (Subsidy + Income) = Loan

Discounted cashflow gives NPV and loan repayment etc.

Acquisition

Works

Fees

Sales

Loan

Understanding Land Values

Acquisition

Works

Fees Subsidy

Sales

Loan

TSC

Reverse the process to establish residual land value

Acquisition

Works

Fees

Sales

Loan

Understanding Land Values

But how can you know the loan without knowing TSC?

Understanding Land Values

Use the Key Viability Test

NPV Net Income – Loan ≥ 0

Therefore:

Loan = NPV Income

Now add to it:

Subsidy (SHG and Internal Subsidy)

Any sales income

=TSC

Understanding Land Values

Understanding Land Values

2-bed Affordable Rent

Aff. Loan* £105,000

Plus

Grant

£18,000

Internal

Subsidy

£10,000

TSC £133,000

Less

Fees &

Int.

£20,000

Less

Works

£85,000

Residual

Land

Value

£28,000

2-bed unit

MR - £625/m

3-bed unit

MR £800/m

AR 80% of MR

Fees & Interest

Assume 15% of TSC

Works, £1300/m² 2-bed

£1250/m² 3-bed

* Affordable. Loan =

NPV of Net Rent

3-bed Affordable Rent

Aff. Loan* £130,000

Plus

Grant

£23,000

Internal

Subsidy

£12,000

TSC £165,000

Less

Fees &

Interest

£26,000

Less

Works

£106,000

Residual

Land

Value

£33,000

Understanding Land Values

2-bed Affordable Rent

Aff. Loan* £105,000

Plus

Grant

£18,000

Internal

Subsidy

£10,000

TSC £133,000

Less

Fees &

Int.

£20,000

Less

Works

£85,000

Residual

Land

Value

£28,000

3-bed Affordable Rent

Aff. Loan* £130,000

Plus

Grant

£23,000

Internal

Subsidy

£12,000

TSC £165,000

Less

Fees &

Interest

£26,000

Less

Works

£106,000

Residual

Land

Value

£33,000

Which of

these units

would be the

best to

develop to

maximise land

value?

Use the Plotting Density to compare different units

How many units of the same type can be built on one

developable ac/ha including infrastructure, parking, etc.

2-bed unit = 14 units/ac

3-bed unit = 11 units/ac

Residual Land Value

2-bed = £392,000 per ac.

3-bed = £363,000 per ac.

Understanding Land Values

Caveats & Notes

o It is important to use a specific works cost for each unit

type – using an average build cost blurs the differences

o Some flexibility to amend mix is required

o Other constraints (e.g. housing needs) may limit flexibility

o Use same approach to minimise grant (for a given land

value)

Understanding Land Values

Caveats & Guidance

o Get plotting density data from your architect

Lastly but most importantly…….

Determine the optimum mix BEFORE you ask the

architect to provide the layout.

Understanding Land Values

Understanding Land Values

And if you have been…………. Thank you !

01483 278444 www.s-d-s.co.uk

contact us

Supporting Older

People Conference

Sponsored by:

Df

B9: Understanding land and land values

Speakers: Paul Tostevin Associate Residential Research, Savills

David Shelton Chairman Shelton Development Services

Chair: Jim Patman

Group Development Director East Midlands Housing Group