Land prices across the country have fallen even more sharply than house prices thanks to the economic slump. But while residential property prices are picking up in some parts, the land market is expected to remain challenging. This is largely because the financial crisis is making it difficult for developers to arrange loans and other financing agreements, say industry analysts.

The value of residential development land fell by half last year as demand plummeted for new-build homes, underscoring losses made across large estates of land amassed by housebuilders during the property boom. And property developers have found it difficult to recover since.

Yolanda Barnes, head of residential research at Savills, the estate agents, says: “The land market doesn’t look as healthy as the housing market for a series of reasons – the chief one being that while there has been a modest return of mortgage credit, debt funding for developers is going to remain very scarce.

“The whole housebuilding model is based around debt finance – which puts developers in a very weak position.”

However, builders’ funding woes throw up opportunities for cash-rich investors to buy at a discount.

A survey carried out in the second quarter of this year by Knight Frank, the estate agents, reveals that in the last year, the price of land for residential development in prime London areas has fallen 45 per cent to between £15m and £45m an acre, while Scottish greenfield land is off 36 per cent and now fetches between £250,000 and £660,000 an acre. In the West Midlands, urban land has fallen 54 per cent over the period to a range of £260,000 to £580,000 an acre while greenfield land there is down 45 per cent to between £290,000 and £550,000.

To exploit the price falls, investment companies are either now looking to launch land funds or enter into financing arrangements with land owners.

Welbeck Land, a property development group, is hoping to raise £100m in new equity, part of which will fund efforts to obtain planning consents for farmers – to increase the value of each acre from £5,000 to more than £2m – in parts of Sussex. In return, Welbeck will receive 20 per cent of the profits when the land is sold, said Alistair Watson, managing director.

“We’d like to step in where the housebuilders were. We won’t build the houses, but we will obtain the planning consent, so the land can be built on,” Watson said.

Cavendish & Gloucester Properties is looking to launch a land fund that will close to investors at the end of July.

The fund wants to purchase land with residential planning permission and then resell it to developers as the market recovers. Planning permissions may also be renegotiated to maximise profits. The fund’s investment term is five years, but shareholders receive a guaranteed income payout of 5 per cent.

“Prices on land with residential planning permission in the south-east have dropped significantly in the past two years, in some cases by more than 60 per cent,” says Jeremy Leaf, who sits on the fund’s property advisory board.

“And the government’s south-east plan for new homes by 2026 means that there will be continued demand for land with residential planning consent already in place.”

Liam Bailey, head of research with Knight Frank, says that in certain blighted regions of the country, property developers are willing to offload their landbanks at huge discounts in an attempt to improve their balance sheets.

“In many cases, land is of almost no value to property developers,” Bailey says.

While many analysts predict land prices will remain low in the near term, not all areas of the market are performing poorly. Prices for farmland, for example, have been showing improvement after almost nine months of falling.

Agricultural land tends to be far less expensive than land used for residential development. But the prices commanded by sellers have moved from an average of about £5,000 an acre to more than £6,000 in some cases.

“Across the country, our farms and valuations teams are reporting renewed confidence among farmers,” says Andrew Shirley, Knight Frank’s head of rural property research.

“Although crop prices are still some way from the peaks seen last spring, which helped to push land prices to record highs, cereal markets are slowly edging upwards after falling sharply in the second half of last year.

“The increasing political focus on global food security is also giving farmers confidence that their industry offers them a long-term future.”