Land Banking – Fixing our Broken Housing Market

The issue of land-banking has increasingly become a political issue, and one which elected officials rightly, or wrongly, see as a barrier to solving the housing crisis.

Land banking is commonly defined as the practice of landowners or developers holding on to land for an extended period, or until it can be sold on at a profit. Critics of this practice view housing land as becoming a short-term investment asset that can be traded between developers (as the values of land increases), instead of building the new homes that may already have planning permission.

As is often in the news, housebuilders are sometimes unfairly accused of land banking. But in truth, the financial incentives for housebuilders are heavily weighted towards the development of the land. For example, the performance of the largest housebuilders is assessed by the City (investors), based on the number of dwelling completions they have achieved each year. This is because it is unprofitable for housebuilders to sit on paid-for land, which has typical financing costs of around 10-12% per year.

Ahead of the Housing White Paper’s release it was expected by many that Government would bring forward much more radical proposals to tackle the issue of land banking. For example, it was rumoured that Government would introduce “use it, or lose it” style powers for local authorities to acquire land that they deem developers were holding onto, or land-banking.

Instead, what we have is a proposed set of measures that are far less punitive. We believe this reflects the reality that the issue of land banking is not clear cut; and the root of the problem is not the action of developers, but some far wider ranging issues - including the severe shortage of housing; the protracted nature of the planning system; and inflationary pressures in the housing market – which is symptomatic of the housing crisis.

It is clear from the Commons debate, that Government understands that there are several reasons why housing sites can stall, which can be misinterpreted by some as land-banking by a developer. As the SoS stated in response to questions:

“We need to respect the fact that there are legitimate reasons why the supply of any product would need to have a pipeline of inputs, including land, in the case of a house builder, but there is evidence of some firms taking advantage of that, as my hon. Friend mentions.” 

It is perhaps important to remember that all housebuilders need a land bank, just as any industry needs a sufficient supply of raw materials to manufacture a product, as the SoS quite rightly points out.

To maintain their business, a housebuilder therefore needs a guaranteed supply of land with planning permission. The supply of land needed in a land bank reflects the lead-in times required before any construction on site can begin - from applying for planning permission; negotiating with a local authority; and finalising negotiations with landowners. As well as this, it is important to remember that the faster a housebuilder sells its homes, the greater its need for a supply of land with planning permission.

It is perhaps against this backdrop that more conservative measure have been proposed in the White Paper, which tinker around the edges of existing policy, rather than address issues head on. Measures include:

Use of Compulsory Purchase Powers

The Government has proposed to prepare new guidance to encourage the use of local authority compulsory purchase powers to support the build out of stalled sites.

Importantly here, the Paper talks about “encouraging” the use of local authority compulsory purchase powers to “support” the build out of stalled sites. The use of these words is far more conciliatory than expected and avoids going so far as to explicitly encourage local authorities to acquire developers’ land.

One possible approach to “support the build-out of sites” would be for a local authority to acquire land that hinders the delivery of a housing site – for example, a local authority could acquire third party land that opens-up access into a site. Of course, this does not rule out the use of this power to acquire a developer’s site that remains undeveloped.

How Realistic it is that a Site will be Developed

Local authorities are encouraged to consider how realistic it is that a site will be developed when deciding whether to grant planning permission for housing development, on sites where previous permissions have not been implemented.

The aim here is to discourage proposals where there is no intention of a developer to build, or where there are insurmountable barriers to the delivery of the site.

In Plan-Making, local authorities are already required to assess whether sites are deliverable – i.e. there is a realistic prospect that housing will be delivered and that the site is viable for development. It appears that that a similar test will now be applied on planning applications, presumably on land or sites that have already by assessed for deliverability by their local plan.

An Applicant’s Track Record

The Government is also seeking views on whether an applicant’s track-record of delivering previous, similar housing schemes should be considered as Material Considerations by local authorities when determining planning applications for housing development.

This proposal is starkly at odds with most of the White Paper by proposing fundamental changes to what can be considered as a Material Consideration by local authorities.

It will be interesting to see how Government proposes to assess an applicant’s track record; and how this will be balanced against the need for a local authority to be objective in its decision-making.

Shorten the timescales for developers to implement a permission

The Paper proposes to shorten the timescales for developers to implement a permission for housing development from the default period of three years to two years, except where a shorter timescale could hinder the viability or deliverability of a scheme. It is not entirely clear at this stage whether the proposals only seek to decrease the timescale for implementation of a full planning permission; or whether this would also catch outline planning permissions, reducing the 3-year period to 2 years for submission of all reserved matters (from the date outline permission was granted), with development to begin within 2 years of the final reserved matters approval.

Having a standard 2-year timescale for implementation is a particularly short period to prepare a site for development and discharge the necessary pre-commencement planning conditions imposed by a local authority.

That said, we have recently represented a number of developers that are willing to offer shorter time periods for the implementation of reserved matters, in order to secure a planning permission. While the timescales are tight, this can be achieved. 

To this end, it is important  that Government increases its  allocation of resources to local planning authorities (which the White Paper seeks to do in part through the potential for increased planning application fees); and measures are put in place to encourage Government agencies and statutory consultees to work constructively with developers and the local planning authority.

The proposals also include a caveat that this shorter commencement period will only apply where a shorter timescale would not hinder the viability or deliverability of a scheme.  Based on our experience, you would expect developers will need to make this case, particularly for larger-scale developments.

Simplify and speed up the completion notice process

Section 94 of the Town & Country Planning Act already provides local authorities with the powers to issue Completion Notices on a developer or landowner - their purpose being to encourage the completion of developments which have been left unfinished. Completion notices have the effect of terminating a planning permission at the end of a specified period.

However, Completion Notices are very rarely used by local authorities, particularly if a developer has since run out of money, or the site is unviable to development. The usefulness of Completion Notices is therefore limited, particularly if it puts off future purchasers of the site where the planning permission has expired.

The Government is proposing that the process for serving a Completion Notice is simplified allowing local authorities to issue notices more quickly.

The aim here of Government is to deter developers from making only very minor material starts on site – i.e. “putting a spade in the ground” to implement their permissions.