Development land prices spike as competition rises
Published 12/11/2015 | 02:30
Demand for development land looks set to accelerate even further in the coming months as competition for sites is intensifying between developers across the offices, residential, hotel and nursing homes markets.
The easing of planning and building impositions on residential developments should also help the market in Dublin and strong regional towns and cities.
While activity and prices increased in other areas, this is expected to slow down especially in areas where homes are still selling for below replacement cost.
Land values are reckoned to have increased by as much as 20pc in the Greater Dublin Area this year according to John Swarbrigg of Savills but he adds that "it is difficult to put an average on it because land values are site specific."
In some cases increases could be even greater and he instances a 0.5 acre Bray site which recently went sale agreed for over €1m or more than 66pc above the price that was agreed for the same site about 18 months previously.
It has an expired planning permission for more than 30 apartments.
Evan Lonergan of Knight Frank says that the strongest price premiums have been paid for ready to go sites.
"The numbers of bidders is strongest for sites with planning for between 20 and 40 houses because these are attracting builders who want to get back into the market or to continue their existing business," he explains.
Some funders are nervous about financing purchases of sites which don't have permissions because of risks associated with third party appeals which can delay projects and add to the cost of funds which in turn can erode the margins on projects.
But a few funders are taking those risks when the developers also have shovel ready sites which will generate returns in the meantime.
"As the pace of house price increases moderates due to the central bank mortgage restrictions, this will be reflected in a slower rise in land values next year," Swarbrigg says.
He believes that because the pace of house price increases has been faster in counties Wicklow, Kildare and Meath, development land prices have seen strong increases in those areas.
He expects that this trend will also ripple out to other Leinster counties such as Westmeath but it has not got there yet.
He says that private equity funds are also considering following Nama's example and opting for licensing of residential sites to builders rather than straight forward sales.
These deals require the developer to build a certain number of units within a certain period of up to three years and to then pay a percentage of the price of the house price to the site owner.
In this way the site owner benefits from the upside in rising house prices. "Land owners could get more than 20pc above the current land values," he adds.
Ironically one of the factors that may be pushing up site values is that Nama is controlling supply of many of its sites to the open market.
The agency sold land with the potential for 11,000 residential units in the greater Dublin area in the past 18 months. However it is also holding back on sales of many sites. A spokesman explained Nama encourages debtors and receivers to enhance the value of their assets before they are sold and sites without planning permission are of less value to potential buyers."
It has 21 development projects currently in the planning system which it believes offer potential for 3,600 units. In addition planning applications will be submitted over the next 12 months for 42 development projects with a further potential for 5,600 units.
Some would argue that Nama is wasting time and money on some of these planning applications because if they were to sell some of those sites on the open market the buyers might seek changes in the plans to suit their own business model or changes in planning and other regulations.
Nama can also argue that planning permissions facilitate licensing deals which can speed up the delivery of homes and the taxpayer will benefit from market upsides.
A number of agents report demand and prices as increasing outside the GDA.
DTZ Sherry FitzGerald marketed seven sites in the Compass Collection of former McInerny Homes sites in Midleton, Cobh and Macroom, Co Cork: Clonmel, Co Tipperary; Bloomfield and Alandale Limerick; and Moycullen, Co Galway.
They had a combined €13m guide price for the combined 105 acres with potential for 800 homes. That would be the equivalent of an average of €123,800 per acre.
Rory Breen of DTZ Sherry FitzGerald said with some planning permissions in place, this was an opportunity for purchasers to engage both short and medium term development strategies.
"The market responded favourably with offers on each asset in excess of their guide prices.''
Will Lyons, who sold development properties across the country through GW2 auctions, says he has recently seen enquiries for development properties including ghost estates that would have attracted no interest in the past.
Cormac O'Sullivan of DNG O'Sullivan Hurley says that zoned land in and around Ennis, Co Clare, have seen prices increase from €25,000 to €50,000 per acre in 2013 and 2014, to between €80,000 and €120,000 per acre. However he doesn't expect further increases for at least two years or until house prices rise by 25pc.
His colleague Shane Flanagan of DNG Flanagan Ford concurs on both recent demand and price increase in Sligo but is also cautious about future trends.
"There are a number of examples recently where development land be it of a commercial or residential nature sold for values approaching €100,000 per acre.
"However to achieve values like this the land would need to be well positioned and ideally suitable for development in the medium term."