Lenders reject builders as land values rise sharply in London

Developers also face squeeze from slowing home price gains and soaring construction costs

PUBLISHED : Wednesday, 09 July, 2014, 5:02am
UPDATED : Wednesday, 09 July, 2014, 5:02am

Surging land prices are prompting lenders to reject more requests from developers faced with slowing home price gains and soaring construction costs.

"The biggest reason we turn down deals is because land values are a bit toppy," said Randeesh Sandhu, the chief executive of lender Urban Exposure Group. "Usually, the only way a developer can get the deal to work is to go back to the landowner and renegotiate the purchase price."

Sandhu's company rejects 98 per cent of approaches for credit on predominantly residential projects.

Central London residential land prices jumped about 26 per cent in the 12 months to March, according to data compiled by broker Savills, as government-backed loan programmes for new homes and rising sales fuelled demand for undeveloped sites.

Land for offices rose 4.4 per cent in the same period.

London homes, valued at about 30 per cent more than the market's last peak in 2007, were appreciating at a slower pace as more sellers offered properties and demand ebbed, property website operator Rightmove said in a report.

"We do see people potentially overpaying for land," said Chris Philp, the chief executive of Pluto Finance, which specialises in providing high loan-value credit for housing construction.

"There's a shortage of land with planning consent to build on and that is obviously feeding into higher house prices and higher land prices."

Housing plots in London cost 27 per cent more than they did in 2007, Savills said.

Value gains have also spread to northern England, traditionally the most volatile housing market, where prices for land not previously developed rose 8.1 per cent in the first quarter, the most in the country.

"The most difficult thing is the developers finding feasible deals at the moment, particularly in London," said James Thomlinson, a founding partner of Voltaire Financial. "A lot of people have been focusing on converting offices to homes and there just aren't that many office buildings with a feasible scope that you can convert anymore."

Developers' profit margins are also being squeezed by rising construction costs as employment in the industry rises at a record pace.

Lloyds Banking Group said in March it planned to avoid funding the development of luxury-home projects.