With Sajid Javid almost haranguing the house builders about land-banking, perhaps it’s no surprise that the biggest of the lot of them (in terms of revenue anyway) commissioned a report on that very question from an economics consultancy. My colleague, Ed Shepherd, pointed me towards it. It’s a very interesting report too that provides a lot of good insights into the residential development process and a lot of good data on the participants in the residential land market. I’m not going to go over the various allegations. The claims of oligopolistic behaviour by the volume house builders have been well aired by Conservative minsters.
The implicit argument of Barratt’s consultants (Chamberlain Walker Economics btw) is that house building does not lend itself to lean production and, in the jargon of Just-In-Tine methods, organised flow scheduling throughput.
Ideally (they claim reasonably that) house builders want to have another shovel-ready plot ready when they have completed a dwelling. Given it takes so long to make a plot shovel ready because of time taken to
- Obtain planning permission
- Discharge post-consent conditions
- Implement lead-in, site preparation etc.
…and the need to take into account
- Failure rates or site wastage (sites that go wrong)
- Business growth of house builders
- Difference in market absorption rates for large sites.
…As a result, they find that volume house builders need to have approximately four plots with planning permission (but still with undischarged conditions etc.) in order to have one that is shovel ready. Conveniently, but (to be fair) plausibly, this is roughly the land inventory that the major housebuilders have.
The modelling demonstrates that a stock of 1.25 million planning permissions (1 million detailed-) would be needed for 250,000 home completions a year in the ‘zero growth’ steady state. This compares to a stock of around 0.8 million planning permissions (0.7 million detailed-) currently. That’s a shortfall of around 450,000 planning permissions.
A lot of interesting further data is presented in the report on the role of non-builders. Although I’m not convinced by their definition of non-builders
‘Nonbuilders’ are a very heterogeneous group and include landowners, land promoters, RSL’s, the public sector, operational and other businesses securing planning permission for other business reasons
RSLs should surely be defined as builders? Anyway…
55% of all planning permissions in England are not held by builders at all. 87% of outline planning permissions are not held by builders.
There’s also some statements of, what seem to be, the obvious
…builders are more likely to have started their detailed planning permissions.
Maybe I’m missing something?
The elephant (calf?) in the room is also that the strategic land holdings of the housebuilders aren’t mentioned. Personally, I don’t see buying land without planning permission or obtaining options on land without planning permission as land-banking but the house builders seem to be trying to have it both ways. They can’t claim not to be land investors when it suits them and then, like Taylor Wimpey below, to say that land investment is a key part of their business model.
A key strength for Taylor Wimpey is our strategic pipeline. This land, which has no residential planning at the time we take a commercial interest, affords significant protection of future returns with a high embedded margin and, importantly, enhances our short term landbank when converted. We have the largest strategic pipeline in the sector which stood at c.108k potential plots as at 31 December 2016 (31 December 2015: c.107k potential plots). During 2016 we converted a further 9,519 plots from the strategic pipeline to the short term landbank (2015: 8,660 plots). With a significantly lower cost and greater control over the planning permissions we create, we continue to seek new opportunities and added a net 10.8k new potential plots to the strategic pipeline in 2016 (2015: 5.8k). In the year, a record 51% of our completions were sourced from the strategic pipeline (2015: 47%).
But it’s the activities and motives of non-builders that we know little about. Even companies like Legal and General Investment Management are getting into strategic land investment.
It’s not necessarily land-banking (depends on how it’s defined) bit it’s all pretty opaque and could usefully be ‘opened up’. We don’t know much about the proportion of non-builders that are holding housing land with planning permission as an asset class (as a long-term store of wealth) rather than as a factor of (housing) production to be released when required.