How to navigate development challenges in a transitional market
By Charlie Hart, Head of Development Land at Knight Frank
4 minutes to read
The UK housing market stands at a pivotal juncture in early 2025, with modest land value adjustments reflecting a sector recalibrating after years of volatility. Our latest Land Index reveals cautious optimism among developers, though significant headwinds persist. As the government pushes ambitious housing targets, the reality on the ground reveals a complex landscape where strategic decision making is critical.
Market reality
Our research shows a development sector responding selectively to challenging conditions. Planning sentiment has improved, with just 61% of survey respondents citing planning delays as a drag on activity, the lowest since 2020. Meanwhile, viability remains the guiding principle for land acquisition and development strategy.
Build cost inflation and regulatory pressures continue to weigh on high-density and urban brownfield schemes. Land values are still adjusting, with averages declining modestly in Q1. Despite interest rates peaking, elevated build costs, labour shortages, and additional regulatory burdens dampen appetite for higher-risk sites.
Tellingly, 40% of respondents indicated that falling land values remain the single most important factor that would boost development appetite, the highest proportion since tracking began in 2021.
Strategic pivot to grey belt opportunities
In response to these challenges, we're seeing a notable shift toward lower-risk opportunities, particularly clean greenfield sites and strategic land in areas where local authorities have underdelivered on housing targets.
According to our survey, over 70% of housebuilders are now considering or submitting applications for "grey belt" land following recent policy changes. With mandatory local housing targets and a more flexible approach to greenbelt development, we're seeing renewed confidence in developers engaging with the system.
As planning frameworks evolve, understanding how to unlock value is crucial. Engaging with industry experts early, who can help navigate policy changes and provide insight, helps form strong acquisition strategies.
The urban challenge
While the pivot toward lower-risk opportunities makes commercial sense, it risks exacerbating an already critical urban housing shortage. Cities remain the UK's engines of productivity, yet urban site development faces multiple challenges that threaten housing delivery where it's needed most.
Molior data on construction starts underscores the widening gap between housing targets and expected delivery. Not a single spade hit the ground in 23 of London's 33 boroughs in Q1 with just 1,210 new homes breaking ground, the lowest quarterly figure since the 2009 financial crisis. Should this performance continue, new starts would represent just 5.5% of the government's annual goal of 88,000 homes for the capital.
Gateway 2 requirements and the Building Safety Act continues to delay urban scheme starts. Complex Section 106 obligations and affordable housing requirements in the absence of meaningful grant, squeezing already tight margins. Labour shortages, a concern for 83% of survey respondents, are driving up construction costs, particularly for bricklayers and groundworkers.
Unlocking urban potential
Overcoming urban viability hurdles requires market expertise and financial creativity. Developers are exploring alternative funding approaches to advance schemes constrained by tight margins and compliance demands. In dense urban environments, deep market understanding, and a tailored approach are proving essential to unlocking stalled sites.
Another move with immediate positive impact would be an equity loan scheme. While Help to Buy has concluded, appetite for a similar initiative remains strong, particularly among first-time buyers. Either government or private-backed models could fill this gap, unlocking activity across market segments. The absence of clarity on such support constrains market potential.
Accessible 90/95% mortgages would help too. While lenders were previously modelling affordability at an 8% peak base rate, many have now eased their approach. Major high street lenders like Santander are now stress testing in the 6-7% range, with others following suit. This adjustment is already helping more buyers edge back into the market and could provide a significant boost if interest rate sentiment continues to improve.
Affordable housing investment
The government's £2 billion investment in social and affordable homes announced in the Spring Statement represents an opportunity requiring careful navigation. The funding targets delivery of up to 18,000 dwellings over three years. While this support is positive, deployment terms will be crucial.
Historically, authorities have introduced complex clawback mechanisms into affordable housing viability situations. Caution should be considered when applying such measures, as they deter developers and investors who view them as an additional tax on outperformance.
Section 106 social rent housing delivery links directly to private for sale housing. Overly punitive financial conditions will undermine private sector confidence, reducing new home delivery across all tenures and missing the opportunity to maximise government investment.
Looking forward
Despite these challenges, there are encouraging signs of market recovery. Our research indicates that 31% of developers reported increased site visits and reservations in Q1 2025, up from just 13% at the end of 2024. This uptick directly correlates with easing mortgage costs, now cited by 70% of respondents as a key driver of sales. Even small rate reductions or positive headlines about the lending environment are noticeably shifting buyer confidence.
While 70% of respondents expect land values to remain static in Q2, with 20% anticipating further declines and only 10% expecting increases, the stabilising market offers a foundation for growth.
Developers embracing diversification across the market spectrum will be well-positioned to mitigate sector risks while capturing emerging growth. Strategic thinking across land types, targeted geographies, and innovative funding will be key to navigating complexities and capitalising on opportunities as confidence returns.
For more details please get in touch with Charlie Hart or contact the Land Agency Team here