Dead meat

When an animal is wounded, the vultures begin to circle. And as the economic downturn claims more victims by the day, the industry’s latest casualties – land owners – are attracting some vultures of their own as cheap deals are luring anyone with access to cash. These include land agents and investors, from wealthy individuals through to institutional investors and private equity houses such as Morley Fund Management, the Prudential, Blackstone and Carlisle. There is also rising interest from public sector clients such as English Partnerships (EP) and from overseas buyers including sovereign wealth funds.

The good news for those wanting to invest and those crying out for new projects to build is that there is little doubt that UK land values will continue to drop in the coming months, resulting in plenty of opportunities for cheap deals. But the best of these will go to those who can pinpoint the optimum time to swoop, when the market hits rock bottom. Until then it’s a waiting game.

Why is interest building now?

Research by Savills released earlier this month shows that land value is dipping more severely than the mainstream property market. The group’s UK Residential Land Development report reveals that residential greenfield land values have dropped 23% in the first half of 2008 and predicts further falls of between 15% and 25% before the bottom of the cycle is reached next year.

In such a volatile economic climate, it is difficult to predict exactly when buyers and investors will make their move. The general consensus among agents and analysts is that mid-2009 would be a good bet, but this is not set in stone. Last week’s news that Lehman Brothers, the fourth largest bank in the US, had filed for bankruptcy is a case in point. “The knock-on effect of the Lehman collapse will mean, like everything else, land prices fall further, faster,” says Jim Ward, director of residential research at Savills. “So this could all happen a lot faster that we thought.”

This month alone, Redrow and Galliford Try became the latest of the major housebuilders to announce they have written down their land values. Last week, Redrow announced a £259m writedown, the biggest that the housebuilding sector has seen, and Galliford Try followed suit earlier this week with a £9.1m writedown.

With land owners looking as though they will be forced to sell at low prices and investors waiting in the wings to pounce, this appears to be yet another market in freefall. But commentators argue that this surge of interest in the UK property market will be crucial to its recovery.

“Sooner or later we have to start buying again,” says Ken Dytor, managing director of Regeneration Investments. “There is a huge shortage of residential accommodation in the UK and we are undershooting the government’s targets by a long way. Anything that puts investment into the market has got to be a good thing.”

Who’s circling?

It seems that more or less anyone who has access to cash is a potential buyer. “We’re talking to a lot of people about land buying on a daily basis,” says one industry source. “Anyone with a healthy cash flow is approaching us and I think we’ll start seeing deals being made next year. We’re talking about wealthy individuals, hedge funds, investment banks and foreign investors, experts in the industry and opportunists.”

Institutional investors are certainly one type of investor on the lookout. Hong-Wei Woon, Igloo fund manager at Morley Fund Management, says he, among others, will be taking an opportunistic approach to land buying: “The bigger sellers – housebuilders looking to get rid of their land – will be approached by the larger buyers and I imagine Igloo will be looking at opportunities where they exist and invest in land if it comes up at a competitive price.”

Next on the list are the land agents who will make the most out of the situation by hitting their contacts and clients in bulk. Jamie Adam, head of development and new homes at estate agent Jackson-Stops & Staff says land for residential development in London and south-east England is the most desirable as the market in these areas is predicted to recover six-to-12 months faster than the rest of the country. “I have a letter written and ready to go on my computer outlining my offer. I will print it out and send it to as many land owners as I can when the time is right.”

It is all too easy to look at the situation as a personal disaster, But we need to see things from the developers’ point of view. They are in a horrendous position

A landowner

There is also increasing interest in the UK market abroad. “International funds will definitely be a big part of the recapitalisation of the UK residential market,” says Savills’ Ward. Dytor adds that these overseas investors will comprise of sovereign wealth funds from the Middle East and other funds and wealthy individuals from all over the world.

And in the public sector, clients with large landbanks are also planning on taking advantage of the cheap land deals. John Walker, chief executive of EP, says: “We won’t be actively seeking out cheap land but if there are sites that would be advantageous to us going for a good price then we would certainly be keen to look into it.”

Will there be a scramble?

Neil Gardiner, a fund manager at Morley, says going for a cheap deal too early can turn out to be costly: “Investors have a ‘wait and see’ approach to land at the moment for two reasons. First, there has been a lack of transactions and valuations in the market recently, which makes it difficult to gauge a good price. Second, when house prices fall, this has a ratcheting effect on land. So, say, house prices fall 10%, then we’re looking at a 20% to 40% drop in land value. So there is an awful lot to lose on land if you buy and the market keeps falling. Therefore investors only want to make a move when it really has hit rock bottom. Predicting when that will be is going to be the tricky part.”

Adam says this is a problem he is facing as he looks into securing some good deals next year. “The timings keep changing,” he laughs. “But I would say the middle to the end of the first quarter of next year is a good bet.” He adds that the usual financial pressures people face around this time of year will make them even more desperate for a quick sale: “People will have paid for their summer holidays, Christmas and new year and they will be trying to pay off credit card bills. Pile the current economic situation on top of that and there will be good deals to be had.”

But Adam adds that, despite all of this, some developers are getting jumpy and cannot wait any longer. Some who are already mid-way through deals are busily renegotiating them. “We’ve had three cases this year where we have had to renegotiate prices,” he says. “Developers were signing contracts for land in good locations south of London for £2m an acre last year when the market was good and now they are asking for 15%, 20%, even 30% off what was agreed.”

The waiting game requires nerves of steel but there are many who argue that those who sit tight will get the biggest rewards. “There’s no point going in now,” says another agent. “The deals will be nowhere near as good as they will be when the market hits the bottom and levels off. That’s what we’re all waiting for.”

Recovery

Of course the prediction that the vultures could save the day depends entirely on whether the land owners will be prepared to sell their land at a low price. So will they? Or will they ride out the storm hoping to get more for it once the market stabilises?

“It is all too easy to look at the situation as a personal disaster,” says one owner. “But we need to see things from the developers’ point of view. They are in a horrendous position: the housing market is on its knees and this is just the process of that filtering through. People will sell at the price that is right for them and it will be up to the individual, but with the market as bad as it is and not looking likely to fully correct itself for several years I suspect many of us will be forced to sell at lower prices than we’d like.”

So, after months of doom and gloom at least there is a glass half full angle to this tale. “Land is where this whole industry starts, isn’t it?” says Gardiner. “Falling prices will attract opportunists but we need to see this as a positive thing because it will be these opportunists who could start a recovery.”