Do housebuilders really hoard land?

15/03/2018
By: LSL Land & New Homes

Do housebuilders really hoard land?

So what is the reality behind this myth? Why might housebuilders maintain small stocks of build-ready land and what really causes delays before the first brick can be laid down?

How the planning process slows down the new build processFirstly we should consider the planning process. Before and after buying land sites, the developer will have to go through a protracted process of submitting plans, listening to community feedback, negotiating with the planning department and submitting revised plans if they fail to get approval. Overall this can require years to complete and may require multiple planning applications. The stronger the level of community opposition the longer the process can take.

To allow for this variability in the planning process, housebuilders maintain a small pipeline of sites in the hope that some of them will get planning approval sooner rather than later. If housebuilders are unable to get their plans approved, they will often opt out of purchasing or sell the land to smaller housebuilders. The planning process may then start again with the new land-owners, who in turn may summit an entirely different set of for consideration.

Once a site has the desired level of planning approval, the housebuilder then has to clear associated pre-start conditions. These are things that the builder must do prior to physically building anything. For example they may be required to construct a roundabout or perhaps relocate protected reptiles. These actions have to be completed and  accepted by the council, often within specific timescales.

Also, many Councils impose additional drainage conditions that require the housebuilder to submit additional plans that demonstrate how surface and foul drainage will be dealt with. These plans must be approved separately before construction work can begin.

The housebuilder has the right to appeal against the conditions if they feel that they are unreasonable, unfair or unlawful. The cumulative effect of dealing with these additional conditions and authorisations is delay and perceived inertia.

Once a site has full planning consent and any pre-build conditions have been signed-off, the onsite building process itself can then start.

The effect of materials supply on the new build processFor larger developments this starts by inviting local material and service suppliers to bid for contracts. Once suppliers have been selected project planning can begin to ensure that right materials arrive at the right time for the right service providers. In areas where key services are in very high demand, this part of the process alone may require months to complete. There may also be dependencies that affect planning, such ensuring that services (water, gas, electricity etc) are in place before other works can start.

Housebuilders also needs sufficient funds available to pay for the work and generally this means selling built properties that are further down the pipeline. If for any reason sales are slow, the developer may have to wait until more units are sold before committing to further expenditure.

Another argument against hoarding is that if a developer purchases too many blocks of land, they will simply lock-up their capital. In turn this generates generate cash-flow issues.

From an external perspective, throughout this long process very little if anything will seem to actually happen. However, the simple reality is that there is a great deal happening behind the scenes.


Gary Needham - Land Director - LSL Land and New HomesGary Needham, Land Director - LSL Land & New Homes, commented that “It is not in the interest of any housebuilder or indeed land promoter to technically stockpile land!  The confusion surrounding “land banking” is a lack of understanding of the land process and the continued deflection from local and central government from the planning process.

If we took a site with an implementable planning permission and sold it to a housebuilder they would want and most likely have to get onto site and start as soon as possible.  In many cases housebuilders, especially SME’s, will be occurring interest on the debt raised to purchase/build the site.  There is no reason for “land banking” that site unless there is a severe downtown in the market and building would result in further financial loss.

Where the confusion occurs is when a housebuilder or land promoter has an option to purchase a site or has exchanged contracts subject to obtaining a viable planning permission.  Gone are the good old days of a redline around a plan, an application form and your fee and submit an outline application (crudely put but outlines the contrast). 

Applications are now lengthy and expensive and can take years in many cases to get through the planning process and possibly the appeal process too.  It is this reason why there is this illusion that housebuilders are “land banking” when in-fact they are slogging their way through the planning process which for some sites starts long before the application is submitted and they are doing this on land they technically do not own and therefore cannot 'land bank'.”

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Update

In January 2018 the Government announced that they would undertake a review to explain the gap between housing completions and land allocated or permissioned in areas of high housing demand, and make recommendations for closing it. The Panel of experts was chaired by Sir Oliver Letwin.

Sir Letwin's said in his Interim Review of Build Out from March 2018 (Letwin 2018) "The fundamental driver of build out rates once detailed planning permission is granted for large sites appears to be the ‘absorption rate’ – the rate at which newly constructed homes can be sold into (or are believed by the house-builder to be able to be sold successfully into) the local market without materially disturbing the market price. The absorption rate of homes sold on the site appears, in turn, to be largely determined at present by the type of home being constructed (when ‘type’ includes size, design, context and tenure) and the pricing of the new homes built. The principal reason why house-builders are in a position to exercise control over these key drivers of sales rates appears to be that there are limited opportunities for rivals to enter large sites and compete for customers by offering different types of homes at different price-points and with different tenures".

Sources

Letwin, O, 2018. Independent review of build out: preliminary update. [Online]. Available at: gov.uk/government/publications/independent-review-of-build-out-preliminary-update Accessed 10 July 2018].

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