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Variety is the spice of life – The Letwin Review, build rates and land promoters

The interim report from the Letwin Review, published in late June, points to an important role for land promoters in helping to address the housing crisis.

Housing Crisis: 101

There are two key stages in building more homes – more planning applications need to be approved but, once permission is granted, those homes need to be built too.

Recent efforts from the government have focussed on the former, and with good reason. The number of homes being granted planning permission ten years ago was about half the number we need to build. Although there is still some way to go, significant progress has been made on that front.

The government has therefore turned its attention to the second part of the equation by asking Sir Oliver Letwin to investigate the reasons for the gap between the number of permissions granted and homes built.

Land banking?

The press billed this as a “land banking” investigation but the interim report found no evidence of the practice. That will come as no surprise to anyone invovled in the industry – land banking just doesn’t make economic sense. That’s why four previous reviews and an Office of Fair Trading investigation, all carried out in the last 15 years, reached the same conclusion.

Instead, Letwin correctly identified the key problem as what he calls absorption rates – effectively the size of the market for a specific product. On any given site, however large it may be, the choice of product available can be limited. When a single developer is building the site out, there might be a range of 15 or 20 house types of various sizes at most.

If a purchaser doesn’t want one of those homes in that location at that price, they can turn to the second-hand market instead. The second-hand market has an almost infinite variety of sizes, styles and locations – it’s where 90% of house sales take place.

The size of the market for the available house types imposes a brake on the speed at which those homes can be sold. To avoid capital being tied up in homes that will stand empty, developers adjust their build rates to suit.

The appreciation of difference

There are ways that this absorption rate – and therefore build rates – can be increased. For example, when two developers are operating on the same site at the same time, they typically build and sell more quickly overall because of the wider range of house types available. To take advantage of that effect, some developers even have two brands with different house type ranges – Barratt has David Wilson, while Persimmon has Charles Church, for example.

On the very largest sites, a similar effect can be achieved by the same developer building on two different parts of the site at once. If they’re far enough apart, they will appeal to different people with slightly different locational requirements.

Variety can be delivered through providing different tenures too. Homes for social rent, discounted market sale or even the private rented sector, can all help developers appeal to a different type of purchaser. Homes can be built to provide for different sub-markets too – retirement homes, perhaps, or student accommodation.

Operational consequences

The more variety a developer tries to deliver, the more difficult it is for them to effectively manage the process. Whilst most private developers are very good at delivering homes for sale in the private market, they don’t have the detailed specialist knowledge that would allow them to appeal to the retirement or student markets too. Similarly, building a wider variety of house types makes it difficult for them to control build costs and take advantage of their economies of scale.

That means when a large developer controls a single site, they usually deliver just their standard range of house types plus the minimum level of affordable housing demanded by the council. Instead of building more quickly to improve their cash flow and return on capital, they achieve the same financial result by paying for land in stages over a number of years, rather than in one lump on completion. The land owner pays the price for the developer not trying to maximise the sales rate.

The Third Way

Land promoters operate in a very different way. They partner with land owners to secure planning permission on their sites before managing their sale in the open market as ‘shovel-ready’ opportunities. A land promoter covers all the upfront costs of securing planning permission, but takes a share of the eventual sales price in return. That means it is squarely in their interests to sell the site as quickly as possible – and the quicker a site is built out, the quicker the land is paid for.

Because a single house builder is likely to spread out the payments for a large site over a number of years, it is much more effective for the land promoter to sell the site in smaller parcels.

A first large phase might be sold to a major PLC builder and a second smaller phase to a regional developer. One parcel could be sold to a specialist retirement living operator, while some individual plots could even be held back for self-builders.

The benefit for the promoter and the land owner is that the land value is realised more quickly but the wider benefit is that build rates are accelerated – developers don’t buy a site with planning permission unless they are intending to start development quickly.

It’s yet another way that land promoters can help deliver the homes the country so desperately needs.

The Strategic Land Group is a land promoter with an established track record of delivering homes and maximising land values. You can learn more about how land promotion works here. If you know of a site that you think might benefit from our involvement, please don’t hesitate to get in touch for a confidential, free, no obligation assessment.

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