The average price of residential development land in England and Wales (excluding London) rose by 2.7% during Q3 2013 following a 1.2% rise in Q2 according to Knight Frank’s residential development land index.

The annual rate of land value growth has reached 4.3%, up from 1.8% in Q2. In central London, development land values increased by 4.5% in Q3 following a 4% increase in Q2, taking the annual increase there to 13.9%.

This increase in land values is a result of the increase in house prices reported across the country as well as rising sales rates experienced by housebuilders, with reservation rates climbing after the introduction of the Help to Buy Equity Loan.

Gráinne Gilmore, head of UK residential research at Knight Frank, said: “The rise in land values reflects the increase in house prices being seen around the country as well as rising sales rates experienced by housebuilders. In fact, housebuilders have seen reservation rates climb after the introduction of the Help to Buy Equity Loan. There have been around 15,000 new home reservations using the scheme since its introduction in April.

“This step up in demand coincides with a key phase of the National Planning Policy Framework (NPPF) when many local authorities are still trying to identify sites which will deliver adequate levels of housing to meet demand over the next five years. As a result, housebuilders have been very active in the market, in a bid to help plug the supply gaps. This is reflected in a 30% jump in planning applications for private dwellings over the summer.”

Housebuilders and developers are holding land for shorter periods of time due to the increased take-up rate for new homes, which as a result is cutting the cost of capital. This is providing more room for land prices to increase.

Housebuilders also have an appetite for strategic land, rather than just the “oven-ready” sites that were most popular in the years after the 2008 financial crisis. Although these strategic sites hold greater risk due to planning uncertainty, the potential returns are much higher.

There is also a strong interest in sites in and around regional cities where supply has dwindled in recent years.

Gilmore said: “The increase in values is a function of high levels of national and international demand for a relatively limited number of available sites. Indeed, it is interesting that increasing numbers of housebuilders who have traditionally focused on the regions, are now making forays into the London market. They are facing stiff competition from those already in the market, as well as new international entrants, such as mainland Chinese developers.”