Unless I’ve been missing something (which is very possible), Oliver Wainwright, the architectural critic in the Guardian, has been quiet for a while on matters land and development. Albeit he did find himself labelled as London’s hottest single man last week (the photos don’t do him justice in my opinion :)). Anyway, my colleague, Peter Wyatt sent me the link to his latest piece in the Guardian last night.
It’s actually discusses the use of option and promotion agreements in the (typically residential) land market. Coincidentally, I did a session on the topic with the final year students here at Reading a couple of days ago. I also wrote something a few weeks ago referring to the call in the update of the Lyons Review for more transparency on the use of options in the land market.
There was a hint in the Lyons Review that the use of option agreements was a problem rather than a solution. Oliver’s piece is much more negative in tone.
…it doesn’t take into account land subject to “option agreements”. These are exclusivity deals between landowner and developer that give the latter a legally binding “option” to buy the land within a certain timeframe or if a certain event occurs, such as planning permission being achieved.
They can tie up land for a long time, cutting others out from the market who might be prepared to build on it sooner. Details are murky because such deals don’t have to be registered publicly, but the housebuilders’ “strategic land banks” show there are an additional 480,000 plots in this state of limbo.
…The fact that land values are so high in the first place is due in part to an entire industry of land promoters and “strategic land companies”. They enable landowners to make big gains upfront based on the projected profits of a speculative development, without having to shoulder any of the cost or risk of actually building that development.
There’s another case to be made here. First, let’s look at what a typical option or promotion agreement (options and promotions are quite similar) might look like.
- The land owner typically has agricultural land without planning permission for housing.
- With the risk that a planning permission might not be obtained, it will cost hundreds of thousands of pounds and involve lots of specialists to ‘promote’ the land through the planning system to get planning permission.
- As Oliver indicates, if planning permission is obtained there can be enormous uplifts in the value of the land.
Along comes Gladman (a major land promoter) and basically says to the land owner
“Here’s the deal. We think that there’s a good chance that we can get a planning permission on your land in the next five years. We’ll pay you tens of thousands upfront if you agree to let us promote the land through the planning system. We’ll take on all the costs of doing this which will be around half a million pounds. (Hopefully) When the land gets planning permission, we’ll sell it on the open market (for millions or tens of millions). You get 85% of the land sale revenue and we get 15%. If we don’t get planning permission, then you’ve lost nothing. We take all the risk. Trust us, we’re experts at this stuff.”
An option is a similar deal. The only difference is that the land owner must sell the land to the option holder (often a volume housebuilder) at a pre-agreed price (typically 85%-90%) of the value of the land when planning permission is obtained.
I don’t really see any “big gains upfront” here. I know that it’s pretty raw capitalism but the key point is that the use of options and promotion agreements could be viewed as a good thing.
- There’s a group of companies out there who are highly incentivised to identify sites and get planning permission for housing.
- Promoters are expert at doing this. Many land owners are amateurs at planning/development.
- For the land owners, the process is largely de-risked.
Arguably, as a result the land market is more efficient and more housing land is being brought forward.
I don’t really see the land as being ‘tied up’ since it is on the market as soon as a planning permission is gained and it is then that the promoter is in a position to realise profits and/or the option holder has to pay the land owner the land value.
The issue of land speculation, banking or investment (take your pick) seems to me to be a separate problem. I would not conflate the use of options and promotion agreements and housing land shortages.