Stock in the lockup

Developers have huge reserves of land, so why are so few homes being built? Graham Norwood investigates the mismatch between supply and demand Britain’s programme of new housebuilding is at its lowest level since 1924, yet developers are reported to have land banks equivalent to two million single-home plots. Builders are clear about why the mismatch occurs – long planning delays and demands for social housing and planning gain by local councils are making it harder to manage land, with the spectre of a slow residential sales market hanging over them. At the housing industry’s historically low current rate of build, that two million plots adds up to 15 years’ worth of land stock, according to the residential research team at FPDSavills. The practice, however, is very different from the theory. Only 15% of this land has planning permission for residential development – roughly two years’ supply, again assuming the current level of building. A further 8% of land is owned by builders and is likely to be used for housing but does not have current planning permission. The vast majority – roughly the equivalent of 1.5m single-home plots – is held as “strategic land”, controlled by developers (usually with options to buy) but by no means certain of being allowed for use for housing. Jigsaw is just the start “It can take years to get these land jigsaws together but the frustrating thing for developers is that often that’s just the beginning. They have to wait perhaps three or four years for planning permission to be granted. It’s not surprising that shareholders or directors want the company to dispose of some of this land to realise some money,” says FPDSavills’ Richard Donnell. The Countryside group, including Countryside Properties and its cheaper sister company Copthorne, has 15,000 plots sitting in the planning pipeline awaiting permission to start development. In 1997 that figure was just 4,000. “We’ve expanded our housebuilding programme a little over that time but the real reason for the explosion has been the time it takes to get planning permission. It’s far slower than it was 10 or even five years ago,” says Richard Cherry, group chief executive. The process is no quicker outside London or the South East, and this has a direct bearing on builders’ approaches to the size and quality of land portfolios. The experience of Redrow, a developer with what it calls “a considerable land bank to supply a three- to four-year building programme”, is typical. “We’ve just spent four years trying to get planning permission for a development on a brownfield site in the middle of a residential area in a northern city. And that is for a development that in every respect it fits in with government policy,” explains group planning director Stuart Milligan. “What we want is a presumption of planning in favour of developers when it comes to brownfield sites,” he says. The Berkeley Group, one of Britain’s largest residential housebuilders, holds around 19,000 plots of land – about a third in London, another third in the South East, and the rest concentrated on the North West, Birmingham, Leeds, Bristol and Cardiff. “We need to hold a much larger bank of land now than we did, say, four or five years ago,” claims group chairman Roger Lewis. “You think you’re getting planning permission for a site in February but that leads out to May and then there’s a request for more information, so it ends up after the summer. As a result of the planning process we need to have stock to ensure a building programme continues.” Lewis also blames a lack of uniformity among local authorities for builders’ concern over the impact of social housing. One of Berkeley’s companies, St George, recently won praise from Mayor for London Ken Livingstone for its Imperial Wharf development, at Fulham, which includes 50% social housing. “We’re in favour of it but without better planning by councils it’s difficult to work out the profitability of land. The government advises 25%, some councils say 30% and Richmond has just suggested 40%. The financial viability of a site diminishes in these circumstances. Some landowners will not sell at a lower rate and just prefer to hold on,” explains Lewis. Richard Rees of FPDSavills says PPG3 and the drive to brownfield development has had a further, inadvertent effect – it has deflated the values of many housebuilders’ strategic land portfolios, which had traditionally been based on greenfield option agreements. To add to builders’ concerns, the current economic slowdown has coincided with the end of the traditional housebuying season. As a result, some developers are exercising caution over their land acquisition programmes in case 2002 proves a difficult year for sales. Higher margins “We’re drawing the line a little higher and making sure any land we buy has slightly bigger margins than usual,” says Berkeley’s Lewis. Countryside’s Cherry says that the slowdown has been too limited to produce a large-scale reaction from his company’s land buyers but that slow planning processes actually help developers in harder times. “Slow planning isn’t good in the long term but at the moment it’s keeping supply down, and therefore prices stable. It also means there’s no real need to dispose of land because demand is still pretty good.” Jonathan Wilkinson of GVA Grimley says that there may be one further side effect – developers will revert to more tried-and-tested designs. “One-off builds tend to be very lifestyle-oriented, and with the tightening of belts across many job sectors they are not likely to be a good gamble.” Several players say 2002 will see the results of structural changes in the residential building industry in 2001. Persimmon’s acquisition of Beazer was quickly followed by the Bryant and Taywood merger, Wilcon’s acquisition of Wain and more recently Wimpey’s purchase of Alfred McAlpine. As a result of the reduced level of competition for sites, some owners are now offering discounts for quick sales. Owners are trying to dispose of land quickly in case the price dips. A prediction by the Valuations Office Agency suggests that residential land values will drop by 10% in the next two years as economic uncertainty grips developers and house buyers alike. Jonathan Vandermolen of Blenheim Bishop, a London estate agency that specialises in new developments, says there is more land for sale now than in most of 2001. This is because mergers among housebuilders have led to sell-offs of land parcels which no longer fit with the new company’s requirements. When this trend is combined with a more cautious approach by developers to buying land expected to support social housing, the result is a temporary glut of land available. “Those big enough, or brave enough, to stock up now could well be laughing all the way to the land bank in a year or two,” suggests Vandermolen. Land banks held by developers ‘Strategic land’ makes up the bulk of the reserve Category of land No. plots Plots held for housing, with planning permission 298,478 Plots held for housing, without planning permission 150,381 Plots held for “strategic purposes” 1,534,645 Source: FPDSavills Major land bank owners 2001-02 Last year saw a spate of mergers and acquisitions Company No. plots* Fairview New Homes 76,500 Persimmon/Beazer Group 56,388 Barratt 31,700 Wimpey 24,000 Berkeley 18,161 Prowting 17,225 Taylor Woodrow 16,700 Bellway 15,500 Wilson Connolly 14,700 Wilcon Homes 14,700 *Figures exclude strategic land and options Source: Credit Lyonnais Laing Housebuilding Annual 2001 Value of land for development as at October 2001 Region Small sites(£ per acre) Bulk land(£ per acre) Price increase in bulk land since spring 2001 (%) Residential land prices are forecast to fall by 10% in the next two years as economic uncertainty affects both developers and housebuyers – current owners are attempting to dispose of land fast in case the price falls North East 263,000 246,960 7 North West 372,470 372,470 7.7 Merseyside 287,500 259,110 7.7 Yorkshire and the Humber 332,000 311,740 2.7 East Midlands 429,150 404,860 5.3 West Midlands 526,315 502,025 1.6 East of England 736,840 801,620 7.0 South East 963,560 923,080 4.6 South West 643,725 595,140 2.8 Wales 336,030 327,935 5.2 England and Wales(excluding London) 550,610 530,360 4.8 Inner London* 2.4m 1.7m 6.5 Outer London 1.79m 1.72m 6.5 Scotland 380,570 319,840 1.3 Northern Ireland 412,955 421,050 N/A Source: VOA. *Excludes Westminster, Kensington and Chelsea, and bulk land in Camden