Wednesday, 13 November 2013

The myth of landbanking


Politicians who think they know about housing are wont to shout about a thing called landbanking:

Ed Miliband will warn developers to ‘use it or lose it’ if they continue sitting on land with planning permission under his government.

In a speech to Labour’s national policy forum this Thursday the party leader will announce plans to give local authorities power to serve compulsory purchase orders on developers.

Town halls will also be able to levy fees on land that sits unused for years despite being approved for development, under the proposals.

The inference of all this is that the big housebuilding companies - Barratts, Wimpey, Redrow and so forth - are buying up land, getting permissions and then sitting on the land.

Without wanting to get all technical, this is twaddle. It's true that housebuilders have landbanks but it's also true that tying up all your capital in land is a daft idea if you make your money from building and selling houses.

Here's an indication of the truth from Barratt:

The interim management statement from Barratt Development PLC said in 2013 it secured 8,150 plots as opposed to 3,685 plots in 2012 to bulk up its landbank.

£150 million more has been spent on land in 2013, £377.7 million, compared with 2012, has £226.8m.

The statement said: ‘We continue to target an owned and conditional landbank of around 4.5 years.’

It's interesting to note here that local planning authorities are expected to maintain a five year supply of deliverable housing land. Barratts are merely matching that process in managing their land supply. What Barratt (and the other builders) aren't doing is buying up land with the intention of waiting for it to "accumulate in value".

The problem - if there is a problem - is the securing of speculative permissions. Landowners - especially corporate landowners - seek permissions for housing to secure a putative value increase (great for bulking up slightly dodgy balance sheets). Until a housebuilder sees the land as viable for development nothing will happen. All over the North's cities and towns you'll see cleared land that has a permission for housing. There is little prospect of these - mostly former industrial - sites being developed so long as the housebuilders has to secure, for Barratt at least,:

...minimum hurdle rates of a 20 per cent gross margin and a 25 per cent return on capital employed based on current market prices.

All the compulsory purchase threats, levies and other big sticks don't change this fact. You cannot use force to make a developer spend millions of his (or the bank's) money when they deem it to be unviable. This is why Miliband's soundbite was stupid - it would stop applications and further dry up the limited opportunities for housing development, especially in the North.

Update: A brief and unedifying discussion of landbanking cropped up on Question Time where Labour's Sadiq Khan rolled out the "use it or lose it" line. Sadly no-one challenges his repeated statement that developers hold land in anticipation of future rises in value - this is simply untrue. Nor is the crazy economics of compulsory purchase questioned or indeed whether, in places like Salford, there really is the need for all this housing (one man in the audience said Salford has about 9000 permissions that haven't been built - this tells me there isn't a market not that landowners are sitting on land). I suspect if you asked any of the landowners for undeveloped sites in Bradford whether they want to sell, they'll say yes. But they won't be looking to make a loss.

Finally, the idea that rescinding planning permissions is an option needs challenge. If you grant permission for housing, the site will remain a housing site regardless. All you do is require another permission before building - there will be no impact on value, just an additional cost for a future developer.

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