Building land with planning permission has always been expensive, but now it is unaffordable, why is this? Prior to the start of the Bank of England start of rate rises in December 2021 the cost of building land was just about affordable in relation the development’s Gross Development Value (GDV). Since then, the value of land has reduced because of the following:
- The increase in interest rates to 5.25%
- The increased cost of labour and materials
- The sale price of houses is flat lining or decreasing
The combination of all 3 has made the asking price of land unviable.
Unfortunately, these facts seem not to have filtered down to the building plot sellers. They are convinced that when developers ask for a reduction in the sale price, they are just trying to increase their profits. As the economic outlook does not look like improving in the short term then unless land sellers are more realistic about the value of their land then it is unlikely they will be able to sell the land.
This is backed up by reports from the property development loan providers, who say that a lot of projects do not now meet their lending criteria because of the cost of the land reduces the overall profitability of the project.
The danger that land sellers face is that planning permission only lasts 3 years. Once the time to satisfying planning permission pre conditions have been taken into account this can reduce the 3 year period by 6-12 months. If the pre conditions include an ecological survey that include a bat survey, these can only be carried from May to September.
Another little known fact is that development finance lenders may not lend on a site with less than 6 months left on planning permission.
Therefor if land sellers don’t take a big dose of reality then they will be left with a site with lapsed planning permission worth half of the value it had with planning permission.