“Always buy land – they aren’t making any more of it”
Or: Why a site marketed for £550,000 is worth…. Less than half that.
The title isn’t actually true of course. Humans have been making land forever – Battery Park in NYC, the nature reserve in Essex made from the spoil that came out of the Crossrail tunnels under London, much of The Netherlands….. but I digress, before I’ve written anything to digress from….
Here in Britain we have been deliberately restricting land use since the 1940s. We could actually very, very easily ‘make more land’ by using just a very small bit of the 94% of this island that is currently not built on. I was going to write all about that here – but it’s such a big (but incredibly tiny) thing that I’m leaving it for another day.
So instead, and just for fun, let’s look at where we are now. The answer, as it turns out, is somewhere in 2007, but again. Even more so in fact, since the Government bottled its latest attempt at planning reform.
Landowners still own all the cards, and the hapless developer just gets the abuse from the NIMBY locals because apparently young people needing 24 years to save for a deposit on average isn’t a big thing. House prices are rising seemingly inexorably. People are once again assuming the good times will never end.
And we know how that ended (if you haven’t seen The Big Short, please do…)
In short: We are clearly at the peak of the market.
I reckon that peak will sustain itself for a while – because supply is getting restricted while people still want to move. Once the reality of higher taxes, energy bills, sanctions on Russia etc kick in fully, then there’s only one way and it’s down.
That’s bad enough – but in the last two years, we’ve seen the price of building materials go through the roof. And the Ukraine invasion simply means more rises to come. Just this week, we were quoted a 20% rise in solar panel prices, from the quote we got in January.
Landowners and their agents haven’t got the message though. Just like with houses, they keep asking for more and more. But in the situation we are in, the price of land should be FALLING now. Falling a lot.
Let’s pick an example. Here’s a piece of land in Nottingham with planning permission for nine homes – eight semis and a detached bungalow. It’s just been reduced to £550,000.
And here’s the accompanying agent blurb:
GUIDE PRICE £550,000 – £600,000. Building plot (0.28ha approx) with outline planning permission granted for a residential development of 9 dwellings (subject to conditions) situated adjacent to allotments, playing fields and Colwick Woods. The plot enjoys view across Nottingham city centre with ease of access as well as being within close proximity of Carlton & Mapperley town centres. There is a proposal for 8 x semi detached house & 1 x detached bungalow.
A new 3/4 bedroom semi-detached house would achieve in the region of £230,000-£250,000 & a detached 2 bedroom bungalow would be £250,000. The potential resale value would be £2 million - £2.25 million.
Every word of that second paragraph is, to put it plainly, absolute bollocks.
The site, on Greenwood Road in Bakersfield, is opposite a school that ‘requires improvement’ and on the edge of a giant council estate. It’s a decent estate – well designed, big houses built in the golden era of post-war development (I used to work for the folks that manage it, so biased, but rightly so).
But – as any estate agent will tell you – there’s always a ceiling price for any area.
So let’s do some maths. The agent’s maths:
8 semis @ £240,000 each (to split the difference) = £1.92m + the £250,000 bungalow = £2.17m.
Minus land value @ £550,000 leaves £1.62m
Developers profit needs to be at least 15% to secure investment. On sales of £2.17m that’s £325,500.
Subtract that from the £1.62m and you’re left with £1,294,500 to build the houses.
Now let’s make some sensible assumptions. This is an outline permission, but let’s expect the semis to be circa 85m2, and the bungalow maybe 100m2. So that’s 780m2 to build.
Now divide that by what’s available to build the houses - £1,294,500 / 780 = a build cost of £1,659 p/m2 (that includes everything – legal, marketing, professional fees etc).
That’s a decent number, even by today’s insanely high material and labour costs. So you’d expect someone to snap your hand off at that land asking price, right?
Well, there’s a reason why this site has been reduced in price…. Let’s run the numbers again, only this time without the rose tinted bias of the agent, starting with studying actual sale values in the area.
The last sale was in the middle of 2021 for…. err…. £178,000. And that’s where the good news ends. The next highest sale was £152,000. Even allowing for you getting a bump in value for these being new homes, there’s not a hope in hell of that bump being in the order of £60,000 to £80,000.
A more realistic – but still very generous – valuation would be £185,000 for the semis, and £200,000 for the bungalow. So what does that look like?
8 semis @ £185,000 each = £1.48m + the £200,000 bungalow = £1.68m.
Minus land value @ £550,000 leaves £1.13m
Developers profit @ 15% on sales of £1.68m = £252,000.
Subtract that from the £1.13m and you’re left with £878,000 to build the houses.
With 780m2 to build that means a build cost of £1,125 p/m2.
And that’s completely impossible at the moment. If you’re budgeting anything less than £1,500 p/m2, you’re budgeting to make a loss.
So what’s the land actually worth? That’s actually really simple to work out:
8 semis @ £185,000 each = £1.48m + the £200,000 bungalow = £1.68m.
Developers profit @ 15% on sales of £1.68m = £252,000 – leaving £1,428,000.
780m2 to build @ £1,500 p/m2 = £1,170,000
Land value therefore £258,000
(Strangely enough, that’s only £8,000 more than what it was originally offered to me for, back in 2018…. And I thought that was too much then).
So why the massive difference between what it’s worth and what’s being asked?
It’s tempting to simply say GREED, pure and simple. And a hope that some developer will be dumb enough to not run even the most basic numbers above. Or just be desperate.
It’s not quite as simple as that though. It would be easy for a qualified surveyor to answer all of this with a load of (perfectly reasonable, considered) data and analysis that the asking price is a reasonable reflection of market conditions.
Maybe. But I would argue it’s not so much about any cold hard facts, today: It’s more a sentiment of where things are going. As I’ve outlined above, I think things are about to go south…. But even when that happens, the price of land is ALWAYS the last thing to fall, not the first.
(Anecdote 1: When we started our business in 2015, I was easily able to identify sites that had been on sale since the 2008 crash. Some were still available – at overinflated prices – a couple of years ago.)
(Anecdote 2: The first site we actively went for was in Melton Mowbray. They wanted £500,000 for it, which I felt was too much. Turned out it was a fire sale – the owners were going under after vastly overpaying for land in 2006-8. In the case of this site, they paid £1.5m. Ouch).
So why do we find ourselves in this position? And how do we get out of it?
Well it’s back to that pesky question of land use again – not so much the elephant in the room as the massive herd rampaging across the land, eating everything in sight.
All of this simply stems from our old friend the planning system – if you deliberately choke off supply of something we have so much of, then demand relative to it will always be high. And when that happens, it’s hardly surprising that the owners will demand top dollar. Because, eventually, there’s always a sucker prepared to pay out.
To return to my point earlier: In the current market, land prices must FALL, not rise. ‘Falling’ to a mere £550,000 isn’t anywhere near enough.
This is now at least the third agent that has marketed the site (go on Street View, and you’ll see a ‘sold’ sign from someone else, dated nine months ago…. and flip to the 2015 image to see the old pub already boarded up).
I’m going to guess that someone has fallen for the ‘always buy land’ argument, and is looking to quickly flip the site at a profit.
But those material prices keep on rising…..
So, even if you paid the full asking price, how could you make it work? You would have to build the absolute lowest quality rubbish for starters. You would definitely be installing gas central heating, while hoping people are so desperate for a new home they’ll accept anything at all regardless of how bad.
Which is how you end up with ‘average new home has 157 snags’ headlines (almost double the rate in 2005).
Meanwhile, building regulations are tightening this year, and again in 2025. This is good - because new homes will need to be better insulated. But it will also raise build costs. The option to build crap will slowly reduce. The impact of that? Fewer homes will get built, because developers can’t afford to build them.
Why? Because the price they paid for the land was too high.
There is an answer though to this planning disaster. Read this.
All we need to do is use 1% of the land in this country - just ONE PER CENT - to solve our energy and housing needs for the next decade. But that’s for next time….