Land Investment

Land investment is a relatively recent concept for the public. For years there had been no easy way for the public to easily buy land nor had the benefits been explained. Investment land is land in areas of housing pressure that has not yet gained planning permission. To buy land without planning permission is around 1/10th the cost of land with planning permission.

Buying land has recently caused a lot of debate in the media with the need for green belt to be developed to ease housing pressures. Speculative land investment in plots without planning permission in areas of high housing need is with the longer-term view that planning permission will be gained in years to come. Having gained planning permission the land may increase in value ten times over.

Residential building land report

This report covers the period 1 July 2005 to 1 January 2006.

Land values over this period have remained relatively stable. There have been far fewer transactions, particularly for sites of any size. However, demand for those larger sites made available is keen, despite the uncertainties in the housing market. Sites for individual dwellings or small developments continue to sell well, particularly if ‘clean’ and where there is no requirement for a social housing element or other substantial planning obligations.

The impacts on land values of the requirements for elements of social housing are not yet clear. The greater proportion of brownfield land being developed, which has site-specific remediation costs, together with very varying site densities, means area in becoming less reliable as a determiner of value. The value reflects the accommodation for which planning consent can be obtained rather than site area alone.

In the December Pre-Budget Report, the Chancellor, announced an increase in the number of houses built each year from 150,000 to 200,000 by 2010. Planning reforms, to accelerate delivery through the planning system, will back these proposals. They are contained in Planning Policy Statement (PPS) 3, which is currently subject to a period of consultation.

Also announced by the Chancellor as part of the Pre-Budget Report, was a period of consultation on the introduction of Planning Gain Supplement (PGS). The proposal is for PGS to be introduced in 2008, as a means of capturing a modest proportion of the value uplift arising on land for which full planning permission has been granted. Initial industry reaction was generally negative, with the problems associated with the application to brownfield sites with remediation costs, and the relationship with s106 agreements commented on. The ‘roof tax’ model used in Milton Keynes was suggested as an alternative. However, more recent comment on the PGS by some parts of the industry has been more favourable.

In late December, a National Audit Office (NAO) recommended that public sector bodies with large landholdings should use it for affordable housing rather than selling it to the highest bidder.

The impact of both the Chancellor’s announcements in the Pre- Budget Report and the NAO study, on the supply and demand for residential building land, and consequently price, will no doubt take some time to filter through to the market.

Property Market Report - January 2006

Land Prices - Forecast

The Property Market Report - January 2006 from the Valuation Office Agency includes a forecast for future Residential Land prices from Technical Forecasts Ltd.

Residential Land Forecast prepared by Technical Forecasts Limited

The residential land forecast

Building Land Investment

The UK forecast continues to show modest increases in land values with an average 10% increase during 2006, with this level of increase continuing in the medium term.

Uncertainties in the market at a national level include the level of supply of new development sites, the need for more affordable housing units and the proposals for a Planning Gain Supplement Tax all of which will impact on the market. A feature of the residential land market is the ‘lumpiness’ of changes in value making forecasting somewhat more hazardous than for markets that respond in a more controlled way to changes in the market place. The forecasts need to be taken together with all other market information that is taken into account in any decision making process.

Background Information

The forecasts have been provided by Technical Forecasts Limited, an established company that is at the forefront in the development of forecasting techniques for the property sector. The techniques adopted for the original series of forecasts published in the Property Market Report have been undergoing continual development. These new systems are based on Bayesian principles and techniques for finding the best average forecasts, given current market forces.

Data Source

The forecasts are based on residential land values which have been collected by the Valuation Office since 1983. The data is based on opinion of value of land in typical locations throughout England assuming the site has a planning permission typical for the location, is ripe for development and has services to the edge of the site.

Methodology

The forecast uses Technical Forecasts' latest methods for forecasting property time series. Radial basis functions have been adopted (a type of neural network) together with information from economic, financial and other property series. The programs select the best economic, financial and property series that give the maximum amount of information to the Residential Land series. Bayesian statistical methods are then used to give the most probable future course of the Land series, given the past data.

The forecasts are made on the basis of relationships that exist in the past history of the data series along with associated economic and financial data. The methods used Construction Orders, Bank of England base rates, Government data series and also Halifax and Nationwide data series as well as other public and private sources of technical data; over 100 other sources of data were scanned and the relevant patterns extracted in order to inform the forecasting process.

Advanced methods of error reduction in the past time series have also been developed . The training of the models is controlled in such a way as to make sure that only the relevant data patterns are used in the creation of the models, eliminating, or at least minimising, any errors that may exist in the data. In this manner only the most relevant past patterns i.e. those that determine the future, are taken into account.

Application

It is important to remember that future values do not necessarily depend on past performance and mathematical techniques cannot take into account sudden social and political changes or other shocks to the market. All forecasts should be treated with caution and should be used in conjunction with professional opinion but they do provide an analysis of relationships within existing data series and present a degree of objectivity over their subjective equivalents.

Technical information about this forecast and on additional property forecasts is available from:

Technical Forecasts Limited
Castle Court
12a High St
Arundel
West Sussex
BN18 9AB
Tel: 0854 2 300 456
Email: mandy.bradley@tfl.biz
Web Site: www.tfl.biz

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