Pete Jefferys
Pete Jefferys

By Pete Jefferys

Land banking: what’s the story? (part 1)

At Shelter we argue consistently that the best long term solution to England’s housing crisis is to increase housebuilding: especially homes which are affordable for low earners to rent or buy. So when it seems that developers are sitting on land – often with planning permission – and not building homes, this frustrates us as much as anyone.

The Local Government Association (LGA) has repeatedly drawn attention to the large and growing stock of unbuilt plots with planning permission (nearly 500,000 on their latest estimate) and the new Communities Secretary has also called out housebuilders for their large land banks. However the industry has responded angrily, saying: “…housebuilders do not landbank. In the current market where demand is high, there is absolutely no reason to do so”.

It is true that ‘land banking’ is a not as simple as just greedy or lazy developers sitting on land. But it’s also true that we shouldn’t let them off the hook entirely. The question of land banking goes right to the heart of why we don’t build enough homes, let alone enough good quality, attractive homes that are affordable to local people.

What is a land bank?

At its most simple, land banks are portfolios of land which could be used for housing and are owned or controlled by a single organisation. That organisation might be a housebuilder, or it might be another type of company which has an interest in holding onto development land.

  1. Non-developers’ land holdings

A 2012 study by the consultants Molior found that in London 45% of sites with planning permission for new homes were owned by a company which did not build homes. A couple of years later that proportion had dropped to a quarter, but there is clearly still a significant amount of ‘land banking’ by non-housebuilders. This is a concern because these firms may be profiting from land trading at the expense of affordable housing or infrastructure obligations.

As for the housebuilders themselves, they typically have two types of land bank:

  1. Current land bank

This is land which has planning permission for housing or is close to getting it. This is what developers themselves are referring to when discussing their land banks: it is the medium term pipeline of sites that they intend to develop. You can see how much land the ten biggest (listed) speculative developers say that they have in their current land banks below – it is typically between 4 and 10 years’ worth of supply.

Table: Current Land Banks[1]

land-banks

Like any business, developers need to have a steady and predictable supply of raw materials to feed into their business. Land is the most critical raw ingredient for house building and so it does make sense for developers to have a forward pipeline of sites with planning permission ready to go.

But we could still question the amount of ‘current land’ that is required to be held in a land bank. Do developers really need to be holding land with planning permission which is 5 or more years away from being built on? It is very unlikely that they have contracts that far in advance for their other materials or for their contractors.

As the table above shows, the Top 10 listed developers – who are responsible for around half of all housebuilding in England – have more than 400,000 plots in their current land banks. This represents more than six years’ worth of housebuilding at their current build rate.

That’s a lot of unbuilt homes. But even this is not the full picture.

  • Strategic land banks

‘Current land’ is not the full extent of speculative housebuilders land banks. The big housebuilders also control vast additional amounts of land in what they call ‘strategic land banks’. Some of this land will be owned by them, but much of it will be held with private ‘Option Agreements’ between the landowner and the developer. In effect these are exclusivity deals which mean that the developer has a legally binding ‘option’ to buy the land within a certain timeframe, or if a certain event occurs – such as planning permission being achieved. The landowner typically receives a non-refundable one off sum to secure the deal.

Why do developers have strategic land banks? First, it is because the earlier in the process of development you control a piece of land, the more you can potentially make from its development. As mentioned earlier, there are lots of land trading companies who exist simply to get planning permissions on land and sell it on for a profit. If a developer can control land right through the process then they can capture more of the ‘uplift’ in its value that a site accumulates as it passes through the planning system.

Second, strategic land banks offer developers more control. Exclusivity deals like Option Agreements make it harder for other players to come into the market by buying land.  The reporting on these Option Agreements is murky, as there is no requirement for developers or landowners to register them publically (something we want to see changed). But you can get some sense of the scale of strategic land banks from the financial reporting of some of the main developers.

Table: estimated strategic land banks[2]

These estimates are almost certainly on the low side, because some of the developers don’t report on their strategic land banks or only report those plots with a ‘positive planning potential’ in the short term. However even this shows an additional half-million plots controlled by the top 10 builders, which is another 6 or 7 years’ worth of housebuilding. In 2008 the OFT found that the ‘vast majority’ (82 per cent) of land held by builders was strategic land, and these strategic land banks were an average of 14.3 years long.

Conclusion: symptom not a cause

The big speculative developers clearly own and control huge areas of land. We estimate that the Top 10 housebuilders alone own or control at least 12 years’ worth of housebuilding plots in their current and strategic land banks. Not all of these are immediately buildable, as they won’t have planning permission – but many will be.

To an extent this is reasonable. They are businesses which exist to increase the value of land by gaining planning permission and selling houses. It is questionable though whether housebuilders should be holding so much land out of the development system for so long when there is such an acute shortage. We also need more scrutiny of the intermediary companies who don’t build homes but hold land in their own land banks.

Ultimately though these land banks are a symptom not a cause of our dysfunctional housebuilding system. We will look at why that is the case in Part 2 of this blog.

 

 

If any speculative developer would like to provide us with more up to date figures, we’ll happily update the table.

[1] Most recent financial reporting as of December 2016

[2] Most recent financial reporting as of December 2016. Estimates from acres to homes based on a density of 12.5 per acre – which was the average in the DCLG Land Use Change Statistics for new build homes 2014/15.

Table updated January 2017 for Barratt Group who got in touch to confirm their strategic land bank at 70,000 plots, much less than the estimate of 140,000 we made based on the acreage.

7 Responses to Land banking: what’s the story? (part 1)

  1. Helen Howie says:

    I am a planner, and know from experience how long it can take to get a site through the Local Plan process – typically 3 years minimum – and then to get planning permission – for a large site, up to 2 years for detailed consent. In these circumstances I can understand why large housebuilders need to ensure that they have at least 5 years’ land in their pipeline, and for business continuity and resilience, preferably 6-7 years’ worth.
    The root cause of the problem is the very real difficulty in getting sites through the planning process. After 15 years in planning, it appears to be getting ever more difficult to get planning consent, which is surely moving in the wrong direction if the country is going to solve the housing crisis!

  2. Thanks Helen, that’s really useful to get your insight. I completely agree that the planning process is slow and often frustrating but I do find it interesting that we grant the same number of permissions per year as Germany (~250k) but build far fewer homes per year than there.

    Personally I don’t think the level of permissions is the main issue (although still could be better). I think the main issue is the reliance on one model of housebuilding – speculative. With multiple models – and a more proactive approach to planning – I think we could build the homes we need.

    • Mark Hanson says:

      Pete, I think you need to differentiate between planning consents and implementable planning consents. Some “consented” sites can’t be commenced because of “Grampian” conditions. which require some external factor to be in place prior to implementation. Others simply have 50 or 60 conditions that must be cleared first.

      • On this point about implementable permissions, I agree and that’s one reason why current land banks are not surprising or wrong! My issue with ‘current’ land is much more to do with build out rates, which are dictated by sales volumes in the second hand market. I’d rather see an approach to land/planning which allows much faster build out rates, which would tangentially reduce current land banks (although that’s not the point obviously!)

  3. Mark Hanson says:

    As a development management person in a Large RP I’d echo what Helen Howie says above. Getting planning is a nightmare, and when you do get it, there will be several months worth of work clearing planning conditions.
    I agree that we need more land to be sold directly to self-builders, but that is a hard one. Most land owners do not want the trouble of providing serviced plots the way that the municipalities do in Germany, although arguably it would be more profitable. They would also have to get planning permission themselves. As a planning application to build say 40 flats in a London borough now costs about £400,000 to put together – and takes a year out of your life – I don’t really see this happening any time soon.
    Again it comes down to sorting the planning system out. By all means decide which land is suitable for housing, but lets just abandon Development Control. Having Planners second-guess Architects is utterly mindless and should stop now. If its housing land , we build on it – end of story.

    • Thanks for the comments Mark – I think we’re probably mostly in agreement. I’d rather see planning be simpler and more upfront, setting land values clearly and simply than the current approach which creates a long confrontation between the authority & developer on largely hypothetical values. I also agree that landowners might be hostile in some cases as they do very well out of current arrangements. That’s why I’d favour a tougher legal basis for authorities to acquire land at lower values, changing expectations in the market.

  4. Henry Charles Pryor says:

    There is planning permission apparently for over 500,000 building plots and at the current rate of building that is about 3 years worth. Why not slap a heavy tax on thes plots until genuine building work starts.

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