The House Building Land-Hoarding Benefit Junkies

mark at tlio.org.uk mark at tlio.org.uk
Tue Mar 5 20:46:42 GMT 2013


The following article is not only about the subsidy issue that housing 
developers get via the Homes & Communities Agency (HCA), through 
initiatives such as the National Affordable Housing Programme which 
invested £8.4bn in affordable housing between 2008-2011, but it also 
refers to the land-banks currently held with planning-permission by 
the larger housing developers - an issue which James Armstrong in 
Dorchester has been banging on about for a long time (since facts 
about this were revealed upon close inspection whilst not especially 
highlighted within Kate Barker's report on the Housing Market in March 
2004). The allegation has long been that the large house building 
firms are hoarding land with permission from which they 'drip feed' 
houses at a rate which ensures that house prices stay high (the author 
below says the volume housebuilders are carrying as much as 5 or 6 
year land banks of consented land) - and that their interests neatly 
coalesce with those of banks and the financial system which puts great 
stock in the high valuation of UK property as means of collateral for 
financial investments domestic and overseas.

Note that The HCA's Kickstart programme provided grants to developers 
in order to rescue stalled projects during the recession, helping to 
maintain employment and output of new homes. One of the most 
groundbreaking Kickstart projects was a £45.6 million investment in 
Berkeley Homes to provide 555 new homes for rent on the open market, 
located in London, the south east and south west. Ref: 
http://www.insidehousing.co.uk/news/finance/-hca-signs-landmark-private-sector-deal/6511491.article
  However, after a campaign for disclosure by Building Design 
magazine, the agency revealed that many Kickstart projects failed to 
meet CABE's standards of good design




The House Building Benefit Junkies Return
By chrisbrown, Regeneration & Renewal
Monday, 4 March 2013
Ref: 
http://chrisbrown.regen.net/2013/03/04/the-house-building-benefit-junkies-return/

This week’s house builder reporting season provides strong evidence of 
how government subsidy to the volume house builders is squeezing the 
smaller builders out of the market and how the subsidy is flowing 
through to management, banks and shareholders rather than to 
increasing output.

Companies reported that around 15% of their sales were on government 
subsidised schemes like NewBuy (notoriously biased in favour of large 
house builders) and FirstBuy. And that is without accounting for the 
indirect subsidy from the Funding for Lending scheme which is credited 
by many with underpinning the growth in mortgage lending.

Interestingly this growth appears to be coming almost entirely from 
the building societies as the banks continue to reduce their exposure 
to all things real estate related. We need to keep an eye on the 
mortgage market because while housing supply remains inelastic 
mortgage availability is the greatest influence on prices and mortgage 
deposit levels are currently on an inexorable downward trajectory and 
starting to contribute to rising prices outside the central London 
vortex which is currently sucking in its share of the world’s 
quantitative easing. As the banks’ ungearing ends it is not impossible 
to imagine that the new Bank of England Governor will need to start 
thinking about Canadian style mortgage controls in the future.

The statistics also show that the big boys are taking a greater share 
of publicly funded affordable building and Taylor Wimpey has said it 
intends to start government subsidised build to rent this year 
although they have also pointed out that it isn’t viable which 
presents huge risks for any brave people bidding next week for the 
government’s proposed licence to run an aggregator vehicle that will 
raise government guaranteed bonds and on lend the money to build to 
renters.

All this government subsidy is sending profits soaring. Taylor Wimpey 
profits were up 106% with the shares up almost 70% this year. And 
average sales prices are up too.

And in a worrying turn of events the trend for the big boys to buy up 
the smaller housebuilders to get access to their land banks appears to 
be returning.

But the number of new homes being built is up just 6%.

The tax payer subsidies are going to repay the banks (who negligently 
overlent to the sector in the first place – particularly Peter 
Cummings at HBoS) and to the shareholders who bailed the builders out 
in the recession when almost all of them were close to insolvency. And 
it’s also going to go to managers. Bonus payments to some of the top 
managers in the sector, while housebuilding remains underpinned by 
public subsidy but not delivering new homes growth, have all the 
hallmarks of a major scandal.

Companies like Persimmon and Berkeley have put in place, starting in 
the recession, ten year bonus schemes which give managers enormous 
rewards for returning cash to shareholders. These schemes have been 
described as excessive and unprecedented and in some cases to be 
achievable without any particularly good performance. In a system with 
weak shareholders, where the management appoints, and pays handsomely, 
the non executives who sit on the remuneration committees to decide 
what the management gets paid, it is unsurprising that these 
situations arise.

In the week when the European Parliament successfully capped bankers’ 
bonuses at one times salary (two times if approved by 75% of 
shareholders) and Switzerland is voting on capping all top salaries 
what are the odds on this happening in housebuilding? I guess it would 
be hard for them to move to Singapore.

Housebuilding is critical to the economy and to the wellbeing of the 
nation. Yet without government subsidy it seems likely that the 
numbers of homes built by the big boys would still be declining as 
they focus on increased profitability and skimming off the cash for 
themselves, their banks and their shareholders.

But this isn’t an anti capitalist rant. Some of those dividends are 
ending up in the hands of pensioners and we need income producing 
assets to allow that part of our financial system to work although no 
doubt many pension funds took a bath in these shares in 2008.

Rather it is a plea for government to take a more intelligent approach 
to restructuring the housebuilding market to encourage the delivery of 
more homes that are more affordable.

The challenge is how to focus government action on increasing 
production rather than subsidy leaking out in housebuilders’ bonuses 
or for banks to deposit with the Bank of England (negative interest 
rates anyone?).

In the past the answer was always for government to directly finance 
housebuilding. Not much cash leakage from this approach (apart from 
the odd bribe by builders to government officials in the Poulson era) 
as contractors’ margins are closer to 3% than the 20% taken by the 
housebuilders. And if the housing is for sale (either to investors or 
to purchasers) then the public investment once made is simply 
recycled.

The danger of this approach is the horrendous system built concrete 
towers the public sector gave us in the late 1960s though the current 
government’s love of the terraced house might mitigate this risk this 
time around.

If Government was to get into house building (as a number of local 
authorities are, though mainly on affordable rents) there is a danger 
of inflating land prices (but by oversupplying local markets 
government could actively bring down house prices and therefore land 
prices which the industry never will). Apart from the difficulty of 
the public sector organising itself to do development (though the 
housing associations have managed it) there is also the issue of the 
relative stranglehold the volume boys have on the strategic land 
market. We need to remember that when the planning minister talks 
about increasing the amount of greenfield land we build on he is 
talking about land that is mostly already controlled by the 
housebuilders. New entrants at scale will always struggle to get hold 
of land with a reasonable prospect of planning permission.

The volume housebuilders are carrying five or six year land banks of 
consented land and this excludes their strategic land (green field 
sites without planning permission) which are many times larger in 
extent (around 20 times in some cases).

The term house builder has always been a misnomer for this industry. 
In reality they are land speculators. They option land and work it 
through the planning process. Most of the profit (and the losses) 
comes from the movement in the land market during the time they are 
holding the land. The process of house building is the way of selling 
plots to purchasers and the margin depends mainly on the amount those 
plots have cost the builders. This is why profits are currently 
spiralling.

Now in any rational world (ie one not run by brickies) someone would 
ask why they go to all that trouble building houses, that the market 
research shows most people don’t like and won’t buy, when they could 
just trade plots and allow purchasers to build the home they want to 
live in. In most of the rest of the world the industry is quite 
different and most homes are built by Custom Build.

Now a FTSE housebuilder manager that was bright and brave enough to 
completely change their business model to Custom Build might be worth 
their enormous rewards.

[end]



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