Philip Barnes – Blog

ATTACKING HOUSEBUILDERS – UNDERSTANDABLE BUT ARE WE THE RIGHT TARGET?

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The election result was perhaps a surprise to many, both within and outside the housing sector.  Armed with an overall majority the Government appears to be pursuing a radical agenda primarily aimed at getting the private housing market moving for first time buyers.

Understandably there have been strong criticisms from organisations who were perhaps expecting a different election result and policy focus.  Some of these criticisms have landed at the housebuilders door.  Usually focused on excessive profits, landbanking, failing to build the right type of homes and trying to avoid affordable housing delivery.

On the profit point I can only give a Barratt perspective.  Our shareholders have suffered lean times over the last few years. In the years after 2006 we made losses of £853m and did not pay our shareholders a dividend for 4 years.  Even our great results for FY14/15 only show a 15.3% profit on turnover – hardly excessive compared to some of our peers and other sectors in the FTSE100. And what will we do with that profit? Return it to our long-suffering shareholders or reinvest it in our operations – namely buying land and building homes for our customers.

Which brings us onto landbanking.  Barratt do not land bank.  As soon as we have bought land we go as fast as possible to build and sell homes on it.  We are a return-on-capital business and our business model requires us to do that.  We do not buy land which does not have planning consent.

However we do secure control of unconsented land by means of option agreements – namely the right to purchase a piece of land should we manage to secure consent.  This is our strategic land supply.  Again our objective is to secure planning permission and build homes on it as fast as possible.

We do not sit on any land.  If one of our option sites fails to secure an allocation in a local plan we may then have to sit and wait until the next plan review, as there is usually no chance of a planning permission before then.  That is not landbanking – it is the planning system forcing us (and the landowner) to wait, against our wishes, to secure planning permission. Indeed if we ever were to “sit” or “bank” land we would quickly have lawsuits against us from angry landowners quite rightly expecting us to work faster towards the planning consent which will realise their asset.

In terms of the criticisms that we don’t build the right type of homes, all I can say is that we need to build to the market demand.  Why? Because of the residual land valuation (RLV) model which all housebuilders, landowners and land agents use to value land.  We compete hard for land and we can only secure it when we are able to pay the landowner a competitive price compared to our peers.

The RLV model is simple.  Gross Development Value (aggregared sales prices) minus costs, minus profit = the price we are willing and able to pay for a piece of land.  Therefore unless we put strong market based (but realistic) sales prices into the model we will never be able to buy land as we will never beat our competitors in the bidding competition.

If landowners or land promoters were not solely interested in land value that would be a different proposition.  Barratt would obviously be happy as we would pay less for land.  Our RTPI National Award winning scheme at the HCA owned site at Hanham Hall in Bristol or our multi-award winning scheme on JRF owned land at Derwenthorpe in York (see below) both pay testament to what happens when an enlightened landowner works with us to deliver outstanding quality rather than just squeezing out maximum land price.

So how do you persuade other landowners to do the same?  Well that’s a question for others to answer.  But one thing is certain – landowners will not sell their prized asset unless they are incentivised to do so.

In the meantime perhaps it should be remembered that we increased the number of affordable homes we delivered by 26% last year (2,853 in total) and paid £580m in tax – obviously far more than when we made no profit at all.  Also we supported over 53,000 jobs last year appointing 327 new graduates and apprentices in the year.  We planted 555,000 trees and shrubs and paid £392m in Section 106 payments for local facilities.  Some pretty hefty socio-economic contributions from a private business which operates in rational ways to the planning and market circumstances which are put in front of us.

Comments welcome.

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Author: philipbarnesblog

Group Land and Planning Director for Barratt Developments PLC. FRTPI, FRICS

One thought on “ATTACKING HOUSEBUILDERS – UNDERSTANDABLE BUT ARE WE THE RIGHT TARGET?

  1. Great prescience given recent headlines on ‘land banking’. The qualitative and quantitative benefits of residential and resi-led development are clear but rarely given enough weight at a local level.

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