Is housebuilders landbanking good or bad for shareholders?

Land banking is back in the headlines. Labour and the Conservatives have promised action as the competition watchdog continues its probe, launched earlier this year, into whether the practice is “anti-competitive”. Critics argue this cartel-like behaviour drives up house prices, but defenders argue it is just good business.

There is no doubt that housebuilders’ land banks have swelled over the past decade. According to Investors’ Chronicle analysis, the FTSE 350 housebuilders’ land holdings have soared 67 per cent since 2013 (see table). For this reason, both the practice and the potential response from politicians are worthy of investor consideration due to the impact they may have on both the housing market and housebuilders themselves.

Land banking’s critics raise many concerns. First, many of these plots have planning permission, and some have had planning permission for years. Housebuilders don’t build out this land as quickly as they could because this would drive down prices, so they build according to market demand instead. The government and public dislike this because they would like new homes to be cheaper, especially given the average UK home now costs 8.24 times annual earnings compared with 3.54 times in 1997.

Those against the practice say large housebuilders’ grip on the market exacerbates the problem. According to data from Savills and development finance provider LDS, smaller housebuilders accounted for just 10 per cent of the homes built in 2020, compared with 38 per cent in 1988. 

The Competition and Markets Authority (CMA) is worried, too. In March this year, it said it was probing housebuilders due to “widespread concerns about housing availability and costs” and “examining whether the practice of ‘banking’ land before or after receiving planning permission is anti-competitive”. The deadline for that report is next February.

Meanwhile, politicians are promising action, albeit without much detail. In March, Labour pledged to give councils more powers to buy undeveloped land cheaply and build it out. And in June, housing secretary Michael Gove told the i newspaper that land banking was “completely unacceptable” and promised stronger council powers to tackle housebuilders who are “building too slowly” in the forthcoming Levelling Up and Regeneration Bill. 

The other issue some have with housebuilders’ land banks is where they hold the land. The Campaign to Protect Rural England (CPRE) is a vocal opponent of housebuilders being allowed to buy and sit on plots in the greenbelt when, according to its calculations, unused brownfield land could deliver 1.2mn homes.

“Brownfield land lays idle, often a blight on communities. While our green lands provide space for nature, climate adaptation as well as benefits for people’s health and wellbeing,” it says. “Harnessing the potential of brownfield land has multiple benefits if we remove the barriers to its development.”

Defenders of the practice say housebuilders are being prudent. For developers, land is inventory, and many tend to hold onto it to ensure they have enough for future development. For Peter Bill, author of Broken Homes, a book on homebuilding and the housing market, land banks should not be measured by plot numbers but the number of years it would take a housebuilder to build out its bank at its current rate of development.

For most, he says, this is about three to four years, and although the physical size of their land banks has increased as the big housebuilders have got bigger, he estimates that the number of years of land available to them will not have moved all that much.

Bill agrees with critics that housebuilders are controlling supply to keep prices up, but he says this is what all businesses do with their products. He also agrees that housebuilders develop according to market demand rather than need, but he questions why this is controversial. 

“It’s not the business of private housebuilders to support the state’s desires for housing. Why should they?”

He criticises the government and housebuilders alike for using rhetoric that suggests housebuilders are building to solve the housing crisis rather than doing so for profit. And although he believes the planning system is flawed, he chastises both for the “absolute nonsense” argument that fixing planning would lead to more housing. Demand dictates supply, he says, and higher interest rates mean less demand, which is why housebuilders are building less this year.

Bill says the real culprits of land banking are not listed housebuilders, but private and relatively anonymous landholders who sell the land to them. While the former make money by selling houses, the latter do it by sitting on acres they have acquired or inherited years ago, and selling it only when they believe it has hit a high enough price.

Aynsley Lammin, analyst at Investec, also defends housebuilders on this front. But he is more critical of the planning system, arguing that its sluggishness necessitates housebuilders’ three- to four-year banks, and questions their ability to control pricing. Although they have an effective oligopoly on new supply, Lammin describes housebuilders as “price takers” because of what is, in normal times, a relatively liquid supply of older homes on the UK market, fuelled by Britons’ desire to move more regularly than their European neighbours.

Even the CPRE recognises that land banking is not the only issue with the UK housing market. “It is clearly a problem, but I don’t think it’s the problem,” says planning policy lead Elizabeth Bundred Woodward, who calls for more local authorities to adopt planning policies dictating where developers should build. This in theory should stop the need for them to hold land banks speculatively.

What critics and defenders agree on is that government housing delivery – or, at least, more of a government role in housing delivery – would reduce the UK’s dependence on housebuilders for supply. If that happened, people might view housebuilders’ land banks differently. But so long as the status quo continues, with the government leaning almost entirely on large housebuilders to meet its housing targets, so too will the debate around land banking.

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