How well is the housebuilding sector placed to cope in the event of a downturn?

While development volumes are likely to be disrupted over the next 18 months with lower levels of activity, Savills expects continued demand for new homes and therefore development land in the medium to long term.

The major housebuilders are in a much stronger position than they were before the global financial crisis (GFC) of 2007/8 being cash rich rather than in debt. The primary challenge for housebuilders is likely to be build costs, which have been rising at their fastest rate since prior to the GFC. Build cost inflation had been offset by house price inflation which was roughly the same level (between 8-10%). However, with house price falls forecast over the next year, these rising costs will no longer off set and will add to downward pressure on land values.

The report finds that while major housebuilders are in a strong position to weather market uncertainty, many SME developers are likely to find the coming year much more challenging. Data suggests that this part of the market is most affected by the rapid rise in inflation, the sharp rise in base rates and borrowing costs. Savills expect this part of the market to contract with smaller developers being less active in the land market over the next 18 months. However, Patrick Eve, Savills head of regional development, notes, ' Some SME housebuilders have been supported by private equity with significant growth strategies and therefore are in a stronger position to weather the market slowdown.'

Outlook

The development land market has enjoyed 13.8% growth in greenfield values since September 2020. However, nationally, land values are only just back to their 2007 peak and the rate of growth over the last two years has been 17% slower than in the two years prior to the 2007 peak.

Eve continues, 'Despite the downturn in the housing market, we expect to see continuing demand for development land and do not expect prices to fall on the scale seen in 2007/8 where there were falls of -55%. With the major housebuilders in a stronger financial position there will not be the pressure to write down land and sell sites cheaply that there was during the GFC.'

There will however be an adjustment in land values in 2023 the report finds. Falls in house prices and reduced transactions will bring land values under some pressure. But Eve comments, 'Given the strong price growth of the last two years, even -10% falls would take values back to 2018/19 levels and there should be enough incentive for landowners to continue to bring sites to market.'

Given their strong cash positions it is expected that the major housebuilders will to continue to buy land - competing for the best oven ready sites. Eve notes, ' There will also be exceptions in the SME developers. Those who have agreed a debt facility prior to September 2022 of those benefitting from private equity investment for instance'.

Emily Williams, Savills research analyst, says, 'We also expect land buyers to become more selective. Major developers are prioritising sites with capacity for 100-200 unit - whereas earlier this year they would have considered sites below 50 units.'

Eve concludes, ' The best sites will remain in demand, due to lack of supply which is likely to limit falls in value over the next 18 months. The huge underlying housing need means that values should return to growth as the cost of debt begins to fall in the second half of 2024.'