Thursday, 30 November 2017

When is land banking not land banking?

When City AM says it isn't:

Hammond said the government will be commissioning a review of the gap between the number of planning permissions granted and the number of new homes being built. If developers are holding back land for “commercial, rather than technical” reasons, the government will intervene, Hammond said, using compulsory purchase powers if necessary...

According to analysis by Shelter, the current land bank of the ten largest listed developers could provide 404,040 homes. At the current rate developers build at, this land would take six years to develop... So, it is beyond doubt that developers own land they haven’t built on yet. But are they deliberately holding onto it to push up house prices?

Anthony Codling, a property market analyst at Jefferies Bank, says land-banking is a “myth”. He argues there are many other limiting factors behind the surplus land. Obtaining planning permission is difficult, there is a limited workforce, and there may be inadequate infrastructure at large sites. Utilities companies, for example, can also be accountable for a delay.

Alan Brown, chief executive of housebuilder CALA group says tying up capital in land with no houses on it “simply isn’t in our financial interests”. Instead, the delay is caused by cash-strapped local authority planning departments, he said. Housebuilders need evidence of cash-flow to drive investment; this is also a reason why they need to acquire land in advance.

They whitewash the issue by redefining "land banking" and as per usual blaming it on local councils.

Hammond, himself indirectly a land banker, defines it correctly as "holding back land for commercial reasons". House builders are profit maximising enterprises with a monopolistic position, so of course they keep new supply at whatever the profit maximising volume is - which Neal Hudson worked out was one new home for each nine existing homes bought and sold in the year. The ratio has been constant for decades, and was the same decades ago when there were lots of small home builders instead of today's oligarchy.

This is smoking gun #1. In 2008-09 when home sales plummeted, home builders mothballed a lot of their developments to maintain the one-to-nine ratio. They gave spurious reasons such as lack of finance, which is clearly a lie - if you have lenders snapping at your heels, the best thing to do is to get developments finished and sold and the debts paid off. Conversely, if you have agreed to lend somebody £100,000 to finance a project, you would be mad to lend them half the money to half-finish something and then refuse to hand over the rest. At that stage you've got to keep going.

As output is decided by external factors, if new planning permissions exceed this level of output (as they do), then these companies will accumulate land banks - the land banks are evidence of profit-maximising behaviour (Hammond's "commercial reaons") and not a crime in themselves. If there were plenty of affordable housing, then it wouldn't matter whether the large home builders have land banks for one, ten or a hundred years' worth of output.

In a report on land-banking, the Home Builders Federation said: “A house building company will be judged by investors on the land that is available to it. If one considers land to be a housebuilder’s most important raw material, a company seeking investment with little or no viable land in its ownership would be unlikely to attract the investment required to finance construction and generally operate as a well-functioning business.”

This is a straight forward admission that his members are land banking, he just says it's for a different reason.


Lola said...

Why the Powers That be don't follow the logical thought process through and start taxing these embedded land bank values defeats me. That would incentivise construction.

Sobers said...

The reason developers land bank is because there are embedded costs in a large development that can only be paid if the houses sell for a certain price.

For example, take a large development of say 1000 houses. It will gain outline planning initially, this is just the agreement in principle that the whole development is OK, detailed planning will have to go in after for the details of individual houses, roads etc at a later date. Concurrent with getting outline planning the developer will negotiate and sign a Section 106 agreement with the local authority, this will agree all the payments the developer must make over the course of that development, for all manner of infrastructure (not just on site, but off site), new schools, new doctors surgeries, sporting facilities, cycle ways, you name it the council will have a list as long as your arm of things they want the developer to pay for out of the profits from just building and selling the houses. Thats all signed and agreed before one house is built.

So all the costs of the whole development are baked in from day one. There is not only the infrastructure required for the specific development area (road, drainage, utilities, sewers etc etc), but also the S.106 payments for the wider social costs. There will be stages in the process when payments have to be made - say the first 100 houses are 'free' then at house 101 a payment of £Xm has to be made for improvements to a nearby road junction, or to build a bigger access bridge over a railway or river for example. And so on and so forth, until the 1000th house is built and all the S.106 payments are made.

So there is no way the developer can build houses for much less than he has budgeted for, once the planning is signed and sealed. If the market drops, and houses aren't worth enough to cover the already agreed s.106 costs (or indeed any site specific infrastructure costs) then the project gets mothballed. No-one is going to build houses if it means you lose tens of thousands on every one.

That is why developers have large banks of land with extant planning permissions, they have to keep the price of houses up to make the numbers add up. The State already HAS a development land tax, its called the s.106 agreement system. That is why the price of houses is so high, the State is setting a fixed tax on every house that is sold. Not a % of the value, a fixed cash amount. And if the house doesn't sell for enough to cover that fixed amount plus the cost of building it, then it doesn't get built, as simple as that.

Mark Wadsworth said...

S, in your heart of hearts, you know that you are skirting the issue. If all that were true, then development land would be worth zero, which it clearly isn't. The lobbyist boasted that they need a land bank to raise finance.

Neither does it explain why new houses cost vastly different amount in different areas.

Lola said...

S. Why not scrap all the s106 thingies then and just use LVT? It is precisely all this bureaucratic claptrap and officially sanctioned blackmail (that ends up in direct imprests and deadweight costs) that a simple LVT system - together with scrapping the Town and Country Planning act - that would sort out.

Sobers said...

"Why not scrap all the s106 thingies then and just use LVT?"

Because LVT would have the same effect, especially on a large scale development that will take years (maybe decades) to build out. Take my 1000 house site, the developer can't be expected to build all the infrastructure for 1000 houses, AND the houses AND sell them at a profit inside a year. Its going to take probably 5 years at best, possibly longer. But from day one when he gets his outline planning the LVT clock is ticking. The theoretical value is there, so its going to be taxed. So he's going to work out how long the project will take, how much LVT will be due in that time (just as he knows how much S.106 payments he has to make over the course of the project) and will need a house price to ensure that tax can be paid. It will just be capitalised into the house prices, as s.106 costs are now.

And if he can't get the required house price that will pay the LVT and all the infrastructure costs and make him a profit, then he'll walk away from the project. All imposing LVT on development land would do is mean that no-one wants to take the risk of developing houses, other than in a very small scale manner, that can be done within a year or two. Large scale urban extensions, forget it. No developer (or indeed landowner) would want to take the risk that they will be sat with land that is nominally worth tens or hundreds of millions, and have a massive annual LVT bill, but can't make the sums add up to build any houses and make a profit. Especially as development land values are highly volatile (and difficult to assess) yet LVT valuations are not going to be annual.

If there was LVT on development land with planning permission granted but no building yet, what you would see is that developers would refuse to own any land until the point they need to start digging on it. They'd try to control land via legal option agreements, but never buy it until they actually needed a specific bit to build something on, thus reducing their LVT risk. But landowners wouldn't want to hold that risk either - many if not most are just farmers, ordinary Joes really. They couldn't afford the risk that the house price market crashes and they are left with a block of land with a massive LVT bill attached. They'd be bankrupted. Everyone will want to sit on their hands, and not get involved for fear of being caught in a financial squeeze that would crush them.

Basically it would end large scale housing developments, as no-one could quantify the market risk over a long time period. So they just wouldn't take that risk. So house building would slow to a crawl, everybody just applying for the number of houses they know they can build out in short time scales.

Bayard said...

"And if he can't get the required house price that will pay the LVT and all the infrastructure costs and make him a profit, then he'll walk away from the project."

What makes you think that's a remotely probable scenario?

"They'd be bankrupted."

No they wouldn't, they could always sell the land. In the extremely remote possibility that it was worthless, they could simply ask for the PP to be cancelled.

Lola said...

S. The only 'infrastructure' they would have to build would be all the developments roads and sewers and other services. They would be spared all the s106 and other crap. The costs of that infrastructure would be factored into the land price, as would the LVT payable. These costs would not fall on the housebuilder they would fall on the land owner. The discounted cashflow cost of the LVT would be discounted over the likely development time and result in reduced land prices.
Furthermore LVT would incentivise the LA's to grant planning permission ASAP. They want the money.
(My old man was a property developer. He used to cost out the 'infrastructure' and discount that from the land price (or more accurately work it out on a cost per plot) and then make his offer for the land accordingly. What else can you do?)