Strange times in the residential land market

Scarcely a conference call between quoted housebuilders and analysts goes by without the chief executive indicating that in all his thirty years or so in the business he has never found it easier to find sites at a price that he can make a sufficient profit on (generally upwards of a 20% gross margin, based on current selling prices and build costs).

Other businesses chasing land do not sound quite so sanguine. In conversations I’ve had of late with a variety of smaller, unquoted housebuilders, housing associations and others, the discourse has often ended with queries along the lines of “psst … do you know where I can get some good land?” Perhaps I’m in the wrong business.

Competition is building up on a variety of fronts. There is the Private Rental Sector (PRS). Hardly a day goes by without some new company emerging – usually well backed by a wide range of investors – and a particular niche “angle”, be it regional, price point or product.

Meanwhile, some of the largest housing associations have embarked on major development programmes, fuelled by eye-wateringly cheap government-underwritten borrowing and, in a number of cases offering their own PRS models, in the hope that profits from this will co-fund their central social housing aims.

Finally, smaller housebuilders appear to be emerging from almost a decade of semi-hibernation amid tentative signs that banks are becoming more forthcoming with lending.

This would appear to contradict the volume players’ relaxed prognosis. Or it could suggest a fairly orderly “horses for courses” approach. PRS players and housing associations could be going for larger urban sites, typically brownfield and complex. This can still be done in conjunction with larger housebuilders, such as the JV between L&Q and Barratt. (It is also core territory for the London specialists, such as Berkeley and Telford.) Small and medium enterprises (SMEs) not surprisingly would generally be confined to smaller infill sites.

This would suggest the area that the mainstream housebuilders are having most success is: suburban; large enough to be out of reach of a newly invigorated SMEs; and not overly-complex or in need of site remediation. In other words, the tradition image of a housebuilder from about the 1950s until the 1980s, when successive governments started getting more interventionist and learning new terms like “brownfield” and “planning policy guidance”.

That’s one theory. Some very respected residential research figures, however, suggest the big guys are getting a bit more hesitant in their land buying. They are bringing forward more of their strategic land (generally, land that they have an option over and endeavour to gain planning permission for, in return for a discount from the vendor) rather than ploughing into the “oven-ready” (which is in an advanced degree of planning permission).

This might be because they had to load up with the oven-ready stuff in the wake of the crash, because accounting rules meant much of their existing sites had been written down to zero margins, whereas newly bought land could generate more acceptable profits. Now with a bit of inflation and a helping hand from Help to Buy, the old strategic plots are now looking more attractive.

That’s my theory. The aforementioned researchers – who are generally more measured in their public pronouncements – err towards the view that the housebuilders are getting a bit more cautious of rising competition, especially from the “M” camp within the SME sector.