Land banking is the practice of house builders buying huge swathes of land both with and without planning, to build new homes. Then sitting on it or ‘banking it’.
It’s standard practice among builders who like to have a pipeline of plots lined up ready to be built on. But, some people believe they do it to artificially keep house prices high, along with their profits. Others claim that the practice reduces the number of new homes available for sale.
So, why do they ‘land bank’? What does this mean? Let’s dig deeper.
Land banking UK
Land banking allows developers make money from the uplift in land prices over time via several different routes, it is argued.
This includes buying strategic land and sitting on it for several years before selling it on for a profit without building on it.
Other developers, it is alleged, like to hold on to land for years to help keep their financial balance sheet looking rosier as the land increases in value.
Is land banking damaging?
Boris Johnson once labelled these practices as ‘pernicious’ when he was Mayor of London, after it transpired that planning permission for 210,000 homes in the capital had been granted but not built.
The Campaign to Protect Rural England recently claimed that over the past ten years the biggest builders have increased their land banks by 20% but built 13% fewer homes.
Many also argue this increases the chance of vacant and abandoned properties.
All this persuaded the government to commission an inquiry into land banking led by former Conservative minister Oliver Letwin. It was published in October 2018 after seven months of hearings and visits to 15 large sites where in total 70,000 homes were being built.
Letwin’s investigation found no evidence that speculative land banking takes place among larger house builders. Yes, all developers do have huge land banks of unused plots, but they need them to maintain a pipeline of land, planning applications and new sites being started, he said.
The report produced by Letwin said it was ‘implausible’ that builders were holding on to land deliberately, and also said his investigation could find no evidence that it was taking place.
“I cannot find any evidence that the major house builders are financial investors [in land] of this kind,” Letwin said.
“Their business models depend on generating profits out of sales of housing rather than increasing the value of land holdings.”
Instead Letwin proposed that developers should be compelled to build more homes and faster by reforming the planning process, which can take up to four or five years to completed on a large site.
He also criticised builders for building too many similar-looking and unremarkable homes which are ‘one size fits all’ and that, if they were more characterful and designed to fit today’s varied and changing household types, would be more popular and help developers reduce their land bank backlog.
The report was welcomed by the industry including estate agency Knight Frank, which echoed its findings. It said claims that developers sit on land was a ‘misconception’.
Are builders profiteering from land banking?
But, not everyone took Letwin’s report on face value. Several months after the report’s preliminary findings were published, homelessness charity The Big Issue completed research that painted a different picture.
It found that on average house builders hold eight years’ worth of plots within their land banks and, in the case of Berkeley Homes, 15 years’ worth. Although it did not find evidence of ‘profiteering’ from land price increases, it did find several examples of developers who regularly buy and sell plots in large numbers.
The Big Issue also found that a common reason given by builders for the necessity of land banks – namely the UK’s slow and expensive planning system – is by developers’ own admission, not quite the problem they portray it as.
“This situation suits housebuilders nicely. Constrained supply has helped push up the average price of a new house by 38 per cent since 2010, against an average of 30 per cent for all houses,” the Big Issue report says.
“And booming prices have in turn generated record-breaking profits and dividends.”
But the trade association for builders, the Home Builders Federation, takes a different view.
It says that house builders ‘completely reject’ the accusation that they hoard land that could be used to provide new homes, pointing out that there have been four independent studies, including Letwin’s, which have all concluded that house builders ‘do not land bank’.
Buying a house?
Ensure you know everything about a property and the housing market around it before you buy.
Using Phil Spencer’s Property Report, you can find details of:
- How much buyers paid for property in the surrounding area;
- Recent planning applications in the neighbourhood;
- Information about registered local businesses, to help you gauge if it’s value for money and the right property for you