Is housebuilders landbanking good or bad for shareholders?

The topic of land banking has resurfaced in the media spotlight. Both Labour and the Conservatives have vowed to take action while the competition watchdog investigates whether this practice goes against fair competition. Detractors claim that this behavior resembles a cartel and causes housing prices to skyrocket, whereas supporters argue it is simply a sound business strategy.

It is without question that house developers have acquired a significant amount of land in the last ten years. Based on an examination done by Investors' Chronicle, the land assets of house developers listed in the FTSE 350 have increased by 67 percent since 2013 (refer to table). Consequently, both the actions taken by these developers and the reactions from politicians are important for investors to take into account as they could greatly influence the housing market and the developers themselves.

Critics of land banking express various concerns. Firstly, numerous parcels of land have been granted permission for development, with some holding this approval for an extended period. However, house developers intentionally delay construction on these lands to prevent a decline in prices. Instead, they opt to build according to the demand within the market. The government and general public are displeased with this approach as they desire more affordable homes, particularly considering that the average cost of a UK residence is now 8.24 times the annual earnings, significantly higher than the 3.54 times recorded in 1997.

Critics argue that the dominance of big housebuilding companies in the market worsens the issue. Based on information from Savills and LDS, a development finance provider, smaller housebuilders only constructed 10 percent of the houses in 2020, while they accounted for 38 percent in 1988.

The Competition and Markets Authority (CMA) is also concerned. In March of this year, they announced that they were investigating housebuilders because of widespread worries about the availability and high costs of housing. They are specifically looking into whether the act of reserving land before or after obtaining planning permission is a form of anti-competitive behavior. The report on this matter is expected to be released in February of next year.

In the meantime, politicians are making commitments, although they are not providing many specifics. Labour announced in March that they would grant local councils greater authority to purchase unused land at a low cost and develop it. Furthermore, housing secretary Michael Gove expressed his disapproval of land banking in June, deeming it "totally unacceptable," and pledged to enhance council powers to address the issue of housebuilders constructing homes at a sluggish pace in the upcoming Levelling Up and Regeneration Bill.

Some people have a different opinion about the land that housebuilders own. The Campaign to Protect Rural England (CPRE) strongly disagrees with housebuilders having the ability to purchase and keep land in the greenbelt area. They argue that there is unused land previously developed for other purposes, known as brownfield land, which could be used to build 1.2 million homes.

"Unused brownfield sites can be detrimental to communities, serving as an eyesore. Conversely, our green spaces offer room for biodiversity, climate adaptation, and positive effects on people's well-being," the statement suggests. "Unlocking the potential of brownfield land can bring various advantages, as long as we eliminate the obstacles that prevent its development."

Supporters of this practice argue that housebuilders are exercising caution. According to them, land serves as stock for developers, and they prefer to retain it to guarantee sufficient resources for future construction projects. Peter Bill, the author of the book Broken Homes which delves into the housing market and homebuilding, believes that land banks should not be evaluated based on the quantity of plots, but rather on the duration it would take for a housebuilder to exhaust their current bank given their current pace of development.

According to him, the majority of people will experience this for approximately three to four years. Despite the fact that the extent of their land holdings has expanded due to the growth of prominent housing developers, he predicts that the duration of available land to them hasn't changed significantly.

Bill concurs with the critics who argue that housing developers manipulate the supply to maintain high prices. However, he contends that this is a standard practice employed by all businesses with their merchandise. Additionally, he acknowledges that housebuilders cater to market demand rather than necessity, but he ponders why this has become a point of controversy.

Private home builders do not have an obligation to aid the government's housing ambitions. What reason do they have to do so?

He condemns the government and construction companies equally for employing misleading language that implies construction companies are addressing the housing crisis out of altruism, rather than pursuing financial gain. While he acknowledges the imperfections in the planning system, he berates both parties for making the nonsensical assertion that rectifying planning issues would result in an increase in housing supply. He argues that the level of demand determines the supply, and since higher interest rates lead to reduced demand, it is the reason why construction companies are undertaking fewer projects this year.

According to Bill, the true perpetrators of land banking are not the registered property developers, but rather, private and somewhat unidentified landowners who later sell the land to these developers. The former group generates income through selling houses, while the latter group profits by keeping the land they obtained or inherited many years ago and only selling it when they deem the price to be sufficiently high.

Aynsley Lammin, an analyst at Investec, supports housebuilders on this issue as well. However, he has a more negative view of the planning system, explaining that its slow pace requires housebuilders to plan for three to four years in advance, and raises doubts about their ability to set prices. While they have a dominant presence in supplying new homes, Lammin describes housebuilders as being influenced by market prices because of the abundant availability of older homes in the UK market, which is driven by the higher mobility of Britons compared to their European counterparts in normal circumstances.

The CPRE acknowledges that land banking is not the sole concern regarding the housing market in the UK. Elizabeth Bundred Woodward, in charge of planning policy, states that while it is indeed a problem, it is not the root problem. She suggests that more local authorities should implement planning policies that specify the areas where developers are permitted to build. Ideally, this would eliminate the necessity for developers to hold land banks for speculative purposes.

Both critics and supporters concur that if the government increased its involvement in providing housing, it would diminish the UK's reliance on housebuilders for housing supply. In such a scenario, the perception of housebuilders' land holdings may change. However, as long as the current situation persists, with the government heavily depending on large housebuilders to meet housing targets, the discussion about land banking will also continue.