Land investor or house-builder?

There have been regular bouts of criticism of the major house-builders for speculating on land prices rather than building houses. As long ago as 1974, it was pointed out in the Investors Chronicle that “[d]espite appearances, house-building is only partially the business of putting up houses. The houses are the socially acceptable side of making profits out of land appreciation”. More recently, the Callcutt Review in 2007focussed on house-builders’ business models and identified the land inventory needs of the house-builders to ensure a supply of developable land. It noted significant variation in the extent of landholdings. While an average ‘holding’ consisted of 2.8 years supply of land, one major house-builder held over six years’ supply.

I see from Bellway Homes recent results that they’ve also spent £620 million on land acquisition in the last financial year. In 2015, they owned or controlled 36,211 plots up from 35,434 plots in 2014.   Over the same period, they actually sold 7752 units for approx. £1.75 billion – the number of units is up 13.2% from 2014. That suggests an inventory of about 4.5 years supply. This makes Bellway look like a land investor (the word speculator sounds too pejorative to me).   You would need to know a lot more about the nature of the plots to assess whether this is relatively high. Some sites may not be viable. Prices and turnover in some parts of the North and Midlands, particularly in apartments, are still below 2007 levels. Some sites may be large and will be developed over a number of years. Also, what does ‘controlled’ mean? Housing land investment seems like a geared play on house prices. If you thought that house prices were going to continue to rise, it might be a better bet to tilt towards companies with large land banks. Alternatively if you thought the unthinkable…

The Lex Column likes the look of Bellway and the listed housing sector in general.   With some caveats, it argues…

Government policies are friendly: extending Help to Buy, a buyer support scheme, to 2020 should stimulate demand; an easier planning process will cut costs; and removing the requirement to build social housing will increase profits.

The Bank of England’s delayed interest rate rise and the strong domestic economy also help. And housebuilding has high barriers to entry — local knowledge is important, while banks might be wary of lending to new entrants.

I’d agree with some of this – friendly policies, low interest rates, planning policies – but I would question some points. I’m not really convinced yet that planning will become easier. Most of the “simplifications” in the planning system seem to have created more work for planning consultants. Many potential new entrants are highly experienced, well capitalised real estate operators – Lend Lease, Land Securities and, more recently, Meyer Bergman (albeit the latter will probably act as land promoters rather than house builders). Many house-builders have a pretty wide geographical scope. It really depends on the definition of local. Removing the requirement to build social housing should increase land prices, and, since many house-builders are also land owners, then profits should increase.

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