Wednesday, 13 January 2016

Economic Myths: Small developers need finance to buy public land.

There was a nice advertorial in today's City AM:

Hearing that the Prime Minister plans to open up public sector land for small-scale developments was a great way to start the year. Gaining access to land is a major hurdle that keeps too many small property development companies out of the market. All initiatives to correct that should be welcomed.

Yet lack of land isn’t the only barrier facing small developers. Accessing finance to purchase that land and put it to work is an even greater challenge; one that’s pushed as many as three in four small-scale property developers out of business in recent years...


No, we've done this before, small developers do not need a single penny of 'finance' to acquire publicly owned land.

Assuming public bodies were rational, they would sell their land for whatever they can get, and cut out the finance middleman by deferring payment of the purchase price until the units and finished and sold.

In the interim, the public body can charge the developer interest, which to all intents and purposes is the same as Land Value Tax. Either the developer pays the LVT interest on the outstanding amount as he goes along, or defers payment of that as well. From the point of view of the public body, whether they get their money today or in a couple of years' time is neither here nor.

Sorted. And there's no reason why the same principle can't apply to subsequent purchasers. Instead of borrowing money to buy the land and buildings, they just need to borrow money to pay for the value of the buildings and they can take over the existing notional loan on the land element and pay 'interest' to the public body on that.

16 comments:

Roger said...

"Assuming public bodies were rational" - a problem for a start, then there are probably rule n regs to consider.

Anyway, would you let some oik dig up your land etc etc then half build something and then go bust (possibly deliberately) leaving you with the agro of restoration and/or finding a new taker. Too risky mate, too many nooks for rogues and lawyers to hide in, hand over the dosh - in full.

DBC Reed said...

MW Very smart idea on your part.

Mark Wadsworth said...

R, why would the developer do that? He loses everything.

The public body in this case is taking on less risk than a bank or other lender. If it's too risky for them, why is it not too risky for other lenders?

DBC, thanks.

Lola said...

Cough. Cough. My old man did almost exactly that with a financier he knew - a Quaker actually. It worked very well indeed. Quaker provided land, old man building finance. So if that can be done privately there is absolutely no reason at all why it can't be done by public bodies?
The only flies in the ointment are the averagely epic incompetence and nasty envy culture in public administration and the huge opportunities for local cronyism and corruption.

Roger said...

Developer A borrows land, does half the work, goes bust. All that is lost is cost of work, public authority left with a mess. Does a phoenix as Developer B - say nah mate this will cost to put right - worth a lot less than you thought.

I agree your idea might work but is not robust against tricky developers - and such do exist.

Lola said...

R. Indeed. But in most market towns everyone knows exactly who they are. Which is my point about guarding against cronyism.

In any event is builder A goes under it would be relatively easy to get in builder B, especially if the initial contracts were properly drafted - which is not difficult.

Mark Wadsworth said...

L, there is nothing new under the sun. I had a client who did something similar because he trusted the buyer (and got paid in full, with interest).

As to inefficiency and cronyism, yes of course. But let's say there is £10 land rent/interest to play for. if a bank collects it, it pays £2 tax to the government and £8 is pocketed privately. Even if the public body messes up a bit and only gets £5. Maybe the developer gets the other £5 as extra profit and pays £1 tax on it. Sooner he gets it than the bank, and overall, the government has collected £6 out of £10 land rent/interest, which is a lot more than £2.

R, can you explain why builders would do this to the public body-lender but not to a ban-lender? Answer is, they wouldn't (short of total and utter corruption) - Lola explains more (and he has more practical experience than either of us).

Lola said...

MW. In the past I would have worried less about inefficiency and cronyism, but since 1997 both have boomed. As an example (but not relevant to development) the police have been morphed from the core duties of protecting people and property to a system of social control. And operators like Lin Homer can seguay themselves fat incomes from years of doing nothing productive at all.

Dinero said...

If the bank thinks that it's not sensible to take on the risk of funding the developer then why would a counil be acting sensibly in deciding to take on the same risk.
The question is, why are the developers in the article having trouble finding funding.

Mark Wadsworth said...

L, we are where we are and getting off topic.

Din, read the article - it is by a finance middleman who is more than happy to lend money to small developers.

Besides, that is not the point. The point is whether small developers need any finance in the first place. Which clearly they don't, as Lola's Quaker example shows.

Lola said...


MW Yeah. Did that in haste of neglected to mark it 'sort of off topic'.

In re 'small developers needing finance' all the good ones build up their capital so that they can buy the land pretty well for cash and then just finance the build. The amateur small developers do it the other way about, and go bust. My old man was the former and he kept trading rom the fifties to getting out in 1988/89 as he (I quote) 'couldn't understand how all the butchers and bakers were making money out of development and since he'd only being doing it for 40 years he clearly knew nothing and decided to retire'....

In my observation it's financing the land that gets them into trouble. If you do it Lola Snr's way the bank always has good security and won't pull the plug. You still have to watch it with flat or terraced developments since you can't exchange or complete on a single unit until you've built the whole block.

Bayard said...

The full title is "Alternative finance can unlock the potential of small developers to tackle Britain’s housing crisis". Well since we know that the "housing crisis" is a myth that doesn't stand up to close examination, is it any wonder that the article is simply thinly disguised special pleading?

Mark Wadsworth said...

B, yes, there isn't a 'housing crisis' in the first place. That goes without saying. My post was about something much simpler and fundamental. There is no need for cash to be paid to the current landowner when building work commences, that is all. That payment can be deferred for a year or two until the finished units are sold.

Bayard said...

Yes, you might as well try to get it up front with a little special pleading. It's only spoilsports like you who point out the obvious.

DBC Reed said...

MW's proposals represent a potential breakthrough, stopping the incessant whining of small business who would otherwise attack wage and employment levels while doing something to address Jeremy Corbyn's recognition that the government (we would say all recent governments) deliberately inflate house prices as matter of policy.
The deferred payment scheme for land could be linked up with the Liam Halligan (?) of the Telegraph's proposal for a State run development corporation, which he seems to think emanates from S Korea although we have had less Statist versions in the UK since WW2.
The British system works (more liked worked past tense) by the State buying land at agricultural prices through compulsory purchase; awarding themselves planning permission; then selling on the land for development at a massive mark-up prices.With the Wadsworth scheme tagged on the end the whole thing could work a treat.
As I keep saying: MW should go on Keiser (with the deferred payment scheme and the entire anti-Homeownerist bag of tricks. Korean Liam is always on. )

Lola said...

MW 20.42 - Yes, exactly. My old man didn't just do a deal with the Quaker financier. he also did them with other landowners on exactly the basis you say - and they 'shared the risk' with the landowner getting paid when the plot was sold. The landowner got a slight premium over what the land would have been sold at outset.

What gets up my nose is that this is soooo bloody easy.