With the national housing shortfall standing at 1m homes, land banks are an easy target for politicians and protestors alike.
When the holdings of 10 of the UK’s largest house builders could provide more than 350,000 homes, it is hardly a surprise that Labour leader Jeremy Corbyn wants to employ “use it or lose it powers” or a land value tax.
But the vagaries of the UK planning system mean having a visible future supply of homes is essential for developers. As one house builder put it: “Just-in-time delivery does not work for house building.”
Outside London, it can take up to two years from land being bought to starting on site. In the capital it takes even longer. As such, builders need a pipeline of sites to ensure they can bring forward some schemes when others are delayed. A healthy pipeline also enables them to maximise economic gain by building out sites at the right stage in the cycle.
Although some firms do profit from rising land prices, large corporate house builders have little reason to hold land for any longer than is necessary.
“There is a no way I can see a corporate holding on to land to make profit,” said one major house builder. “It is almost a negative factor. Investors will ask, ‘Why is your land bank so big and how are you going to convert it to cash and return it to shareholders?’”
Nevertheless, investors like to see a substantial land bank in annual reports, because it gives an indication of future income and profitability. Likewise, banks would be unwilling to lend if they did not see a large, visible pipeline of future profit.
But as the analysis below shows, the average land bank would last just 5.4 years, assuming completions remain at current levels.
Since 2010, the supply of land has declined by almost a year, as more sites are brought forward for development in the booming market.
And while Corbyn may be critical, the Lyons Review was more cautious about dismissing land banks as a speculative play.
It said: “Given that the process of bringing through strategic land can be costly, risky and can take a number of years, the use of options and strategic land banks is a necessary part of the process of promoting land through the planning process. However, it does mean that a large amount of development land is tied up in option agreements and is not available to other developers.”
As Transport for London brings forward thousands of sites for sale or development and the GLA, Ministry of Defence and NHS look to release value from their estates, there is enormous public scrutiny to ensure they get the best return, rather than selling them all at once.
The same applies for any house builder.
