Why Land Banking Is a “Myth,” According to the Home Builders Federation

Indeed there are a few hundred thousand plots awaiting building in the UK. But what’s holding back homes is bureaucracy and construction time.

A popular idea in the United Kingdom holds that the housing shortage is due at least in part to developer and homebuilder “land banking.” In the strictest sense, this is when people or a company hold un-built land like a financial security, anticipating the price will go up.

There certainly are problems with building enough homes in the UK. Cumulatively over the past ten years the country has fallen behind by more than 1 million homes. The shortage of supply has indeed driven up the cost of homes and the land on which they are built in London and many other parts of the country. Along with rising home costs go rental rates, also skyrocketing.

But there are several reasons why the land banking accusation is easily challenged. To start with, those prices are now at an all-time high, so if it were a simple matter of waiting for prices to rise that would then suggest a huge unleashing of land and built property would be taking place now. There is a sizable segment of strategic land developers who already are effectively turning empty land into residential properties – however, most of those were acquired months, not years, ago.

Another inconvenient bit of information is basic microeconomics: it makes no sense for any business to tie up capital for long periods of time without extracting utility or value from that capital. Our “just in time” business supply culture keeps a laser focus on carrying costs, purchasing input products only when those inputs are ready to turn into something that will generate revenues. Why invest large sums in something you do not intend to use for several years?

In fact developers and homebuilders – a function very often split between two parties – will need time to get land acquired, approved and built. And by time, that can be several years in the most ideal circumstances. To tie up assets in land on the speculation that prices will increase is not a game that most businesses want or need to do. For homebuilders and their investors, getting a return on investment in a short period of time is the primary objective; this is even truer for smaller home builders who have less capital with which to work.

According to Stewart Baseley, executive chairman of the Home Builders Federation, the term “land banking” is a term that rarely applies to the home building process. “When you look beyond the rhetoric and the lazy accusations, the facts are quite clear: house builders do not hoard land or land bank unnecessarily. The debate really needs to be about how we get the land in the planning system through more quickly to build the homes we need.”

The Home Builders Federation takes exception to criticisms that land banking is some conspiracy or that it even takes place. In a report issued in May 2014, “Permissions to land – debunking the land banking myth,” the organisation states the following contrary points:

• 220,000 plots (representing as many homes) are said to be land banked by Britain’s larger homebuilders. But only 4 per cent of those plots have implementable planning permission where work has yet to begin.

• Of that same 220,000 plots, construction is already underway in a majority of them. Because these are larger homebuilders, these are the larger developments where construction is on a grander scale and therefore can take longer to be completed.

• 31 per cent of sites have only an outline permission (where construction is not yet allowed) or are still awaiting local planning authority discharge of planning conditions.

• 4,400 sites (2 per cent) are deemed non-economically viable for development.

The difficulties of achieving planning permission have driven the industry in part to a two-step process. Increasingly, joint venture partnerships will identify and acquire land that property fund managers believe to be appropriate for use changes. Once that planning approval is achieved, the fund will develop infrastructure such as roads and utilities, but sell plots to homebuilders who handle the development from that point. To be clear, those investors are looking for a turnaround in their investment of between 18 and 60 months, the shorter the better.

When investors consider this type of asset and its growth potential, they typically engage a third party to assess the opportunity for its risks and return potential. An independent financial advisor should always be engaged to determine if the land deal is appropriate for the investor’s overall wealth management strategies.

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