WHERE DO LAND DEVELOPERS GET THE BEST RETURN ON INVESTMENT IN ENGLAND? DEVELOPER REPORT

Transcription

1 WHERE DO LAND DEVELOPERS GET THE BEST RETURN ON INVESTMENT IN ENGLAND? DEVELOPER REPORT

2 CONTENTS Introduction Methodology The Cost of Land Land Prices: A Regional Analysis Comparing House Prices House Prices: A Regional Analysis Return on Investment Return on Investment: A Regional Analysis

3 labcwarranty.co.uk INTRODUCTION The supply and availability of suitable land is often cited as a key constraint of the house building industry. Delivering profitable developments relies not only on finding suitable land but land available at the right price. Typically, the value of land is linked to the potential sales value of developments. The residual value of the land is assessed by considering the potential sales value of the development (the Gross Development Value), minus the development costs. The remaining difference gives the residual land value, with an allowance for profit. With the price of land intrinsically linked to the potential house prices, purchasing land has been described by Savills as a leveraged bet on house prices. The greater the difference between the residual land value and the Gross Development Value, the greater the opportunity for profit. In other words, the developer can improve their odds on their bet on house prices. With this in mind, LABC Warranty has conducted a study into which areas of England has the greatest variance between land prices and potential sales values. Whilst this ignores any variances in construction costs it shows an indicator of the potential for positive ROI for developers in different regions of England.

4 labcwarranty.co.uk METHODOLOGY The Cost of Land Land prices in this study show the median price for each county and overall region. Land included in the research has granted planning permission and is a single plot. Using Plot Browser, prices for every plot of land that met the requirements for each county was collated before determining the average and median cost. Please note that in this report, comparisons are made based on the median figure rather than the average. Comparing House Prices Using a data scraping tool, prices for -bedroom new builds in each county/region of England were collated. Due to availability, the minimum number of houses analysed in each county was 00 and the maximum 00. This dataset enabled the average and median cost of a property of this type to be determined. Please note that in this report, comparisons are made based on the median figure rather than the average. Return on Investment Return on investment has been calculated by finding the percentage increase between the average/median cost of land for each county and the average/median cost of a -bedroom new build. In this case, return on investment refers to the gross yield rather than net yield as additional costings for building the property and associated legal fees have not be subtracted. This does not consider the regional differences in build cost.

5 labcwarranty.co.uk THE COST OF LAND LABC Warranty collated prices of land up for sale with planning permission to build one property in order to compare the median cost of purchase for counties across England. The most expensive counties to purchase land for property development is Surrey and Hertfordshire, with the median price setting a developer back by a sizeable 0,000. The second most expensive locations to buy land are Hampshire and Berkshire, with the median price of,000. They were closely followed by East Sussex, whereby the median cost for land purchase is 0,000. On the other end of the spectrum is South Yorkshire. In this part of England, the median cost for purchasing land with planning permission will set developers back by just 0,000. Greater Manchester closely follows South Yorkshire, with land priced at reasonable,99.0. Bedfordshire also offers affordable land for property developers, with a median price of,000.

6 labcwarranty.co.uk AVERAGE LAND PRICES Most Expensive Least Expensive Surrey 0, Hertfordshire 0, Berkshire, Hampshire, East Sussex 0, Buckinghamshire,99.0 Kent 0, West Sussex 00, Essex 00, Oxfordshire 9, South Yorkshire 0, Greater Manchester,99.0 Bedfordshire, Derbyshire 0, County Durham, Cumbria, Tyne and Wear 9,.00 East Yorkshire 9,99.0 West Yorkshire 99,999.0 Warwickshire 00,000.00

7 labcwarranty.co.uk LAND PRICES: A REGIONAL ANALYSIS Overall, South East England is home to the most expensive land prices in the country. The median cost across all counties in the South East region is,9.; much higher than other areas. East of England is the second most expensive region, however, at,. it is still considerably cheaper than purchasing land in the South East. Yorkshire is the cheapest region to purchase land by a considerable amount. To put things into perspective, if a property developer chose to purchase land in South East England, they would most likely pay,9. for one plot space. If they decided to buy land in Yorkshire however, it would be possible to buy four times the amount of land and still have change of.. In North East England, it is also possible to buy land with planning permission for less than 00,000. In this region of England, land with permission for a single property has a median price of just 99,9. East Midlands follows as the third most cost-effective region to purchase land, at a reasonable 0,000.

8 labcwarranty.co.uk REGIONAL ANALYSIS OF LAND PRICES South East England East of England South West England West Midlands East Midlands North West England North East England Yorkshire,9.,.,90., , , ,9. 90,.

9 9 labcwarranty.co.uk COMPARING HOUSE PRICES It s no secret that house prices fluctuate depending on location. It s an aspect of property development that needs to be carefully considered before purchasing land. If property prices and/or demand is low in the area, it means that making a significant return on your investment may be, in theory, more difficult. Surrey has the highest new build house prices in our study, with a -bedroom new build costing,000. Hertfordshire follows closely behind with the median price of purchase 90,000. With a price tag of 0,000, buying a -bedroom new build in Berkshire is also an expensive option. South Yorkshire is the least expensive county to purchase land, and new build house prices in the area reflect this. The median cost associated with buying a -bedroom new build is an affordable 0,000. The price of purchasing a new build property of the same size in County Durham is also cost effective if you re a homebuyer at 9,000. Merseyside emerges as the third most cheapest area to purchase a house, with the median cost at a modest,99.

10 0 labcwarranty.co.uk AVERAGE HOUSE PRICES FOR A BED SEMI-DETACHED Most Expensive Least Expensive Surrey, Hertfordshire 90, Berkshire 0, East Sussex,00.00 West Sussex 00, Buckinghamshire 9, Kent 9,00.00 Essex 9,99.0 Bristol,9.0 Hampshire 0, South Yorkshire 0,000 County Durham 9,000 Merseyside,99 Tyne and Wear,99 Lincolnshire 0, Lancashire,99 Cheshire 9,99 West Yorkshire 9,99 Northumberland 9,000 Derbyshire 99,99

11 labcwarranty.co.uk HOUSE PRICES: A REGIONAL ANALYSIS The relationship between house prices and land value can be seen in the fact the regions are ranked in the same order for both measures. The North East and North West are the most affordable regions when it comes to purchasing a new build property. The median price on the market for a -bedroom property of this type in the North East is 9, and 9, in the North West. In contrast, the most expensive -bedroom new build is likely to be found in South East England. Buyers in this area can expect to pay a median price of 0,000. In the East of England, the median cost is lower at,. However, it is still much higher compared to regions in the north of England. Our data research supports the assumption that house prices steadily increase the further south you are in the country.

12 labcwarranty.co.uk REGIONAL ANALYSIS OF HOUSE PRICES South East England East of England South West England West Midlands East Midlands North West England North East England Yorkshire 9,00.00,.9 0,000.00,.0 09,. 9,. 9,.00 9,.00

13 labcwarranty.co.uk RETURN ON INVESTMENT In recent years especially, the housing market has been notoriously volatile. As demonstrated with our research into house prices, the challenges that are present within the industry tell a tale of two halves. Those in London and the surrounding areas in particular, face soaring house prices which are proving fatal to would-be first-time buyers, despite prices stabilizing in recent months. Meanwhile, in North England while house prices remain lower, recent research carried out by the BBC suggest that some homeowners are struggling to make a profit when it comes to selling their houses. Combine that with a low interest rate that has spanned across an entire decade, it is clear that any purchase within the industry needs to be carefully considered. However, the current shortage of affordable homes has sparked an increase in the number of people buying land with planning permission, with the aim to self-build their own home or use it for property development on a larger scale. Homebuilders must be aware that location can drastically influence the potential for a positive return on investment. We ve compared the median cost of land purchase for each county in England and compared the median cost of purchasing a -bedroom new build. This enabled us to determine the potential return on investment for homebuilders investing in each area. Bedfordshire offers the biggest potential for profit with the Gross Development Value representing.% of the residual land value. Land buyers in this area can purchase a plot of land with planning permission for a median figure of,000; the third least expensive price in England. When it comes to selling the developed property, a -bedroom new build is likely to sell for 9,99. This gives a return of,99 before subtracting the associated cost of building the property and legal fees.

14 labcwarranty.co.uk With a gross yield of 9%, Warwickshire also appears to be a good location to buy land for development. The median land cost for the county stands at 00,00, which is relatively low compared to many other areas. Much like Bedfordshire, the house prices in Warwickshire are high in relation to other counties, standing at a median price of,99. So, before all other associated land development costs, profit stands at,99. Greater Manchester emerged as the third best prospect for land developers. The median price for purchasing land with planning permission in the area is,00, the second cheapest figure in England. However, house prices in Greater Manchester are certainly not as high as properties in more southern areas of the country, with the median price being 09,99. However, the potential for a positive ROI before subtracting other costs still emerges at,9, a.% increase on investment. In contrast, Hampshire provides worrying statistics for land developers. The median figure that emerges for the cost of buying land is,000 which is one of the highest in the country. The median cost of a -bedroom new build is also extremely expensive at 0,000, which means it would only yield a gross profit of 000, or.% not including development costs. Profit margins for homebuilders operating in Cheshire are also slim. In contrast to Hampshire, purchasing land is much cheaper at,000. However, in this area the median house price for new build property types is 9,99. This gives a slim difference between the residual land value and GDV of.%. The county with the third lowest potential for a positive return on investment is Buckinghamshire. The median cost of land purchase in this area is,99.0, which is high. With the median statistic for a -bedroom new build sitting at 9,000, the gross yield of,00.0 will not cover the development costs.

15 labcwarranty.co.uk RETURN ON INVESTMENT Most Return on Investment Least Return on Investment Bedfordshire.% Warwickshire 9.00% Greater Manchester.% East Yorkshire.00% Dorset 0.00% 9 0 Derbyshire 9.99% Cumbria 9.9% Cambridgeshire 9.0% South Yorkshire.9% North Yorkshire.00% Hampshire.% Cheshire.% Buckinghamshire.0% East Sussex 9.9% Berkshire.% 9 0 Kent 9.% Essex 0.00% Hertfordshire.% West Sussex.% Wiltshire.9%

16 labcwarranty.co.uk RETURN ON INVESTMENT: A REGIONAL ANALYSIS With most counties in the South East featuring in the bottom 0 when it comes to potential profit through property investment, it is not surprising that the region projects the least gross yield overall. With the median figure for a -bedroom new build in the region totalling,9. and the median land price sitting at 9,00, a homebuilder can expect a % difference between land cost and potential GDV. This is by far the lowest profit margin across all regions. The East of England is the region that offers the second lowest gross yield, however, our research suggests that homebuilders could still potentially make a return of 0%. In contrast, Yorkshire offers the best potential for return for homebuilders. The overall median cost of purchasing land in Yorkshire is 90, and -bedroom new builds are likely to be priced in the region of 9,. This amounts to a healthy.9% difference, before subtracting any additional costs.

17 labcwarranty.co.uk REGIONAL ANALYSIS OF ROI Yorkshire West Midlands North East England South West England East Midlands North West England East of England South East England.9%.% 9.9%.%.%.9% 9.%.%

18 WHERE DO LAND DEVELOPERS GET THE BEST RETURN ON INVESTMENT IN THE ENGLAND? DEVELOPER REPORT