What Exactly is Land Banking? Buying Undeveloped Land

by Robert Jones, Founder of Property Investments UK
With two decades in UK property, Rob has been investing in buy-to-let since 2005, and uses property data to develop tools for property market analysis.

Land banking is an issue that affects the property market and the housing market. Here we will look at what exactly it is and why it happens.

What is Land Banking?

Land banking usually describes a situation where a property developer buys a plot of land to develop at some point in the future. In the meantime, the land is considered to be held in their land bank.

It is something usually done by housebuilders. Some land is acquired and held. The intention is that houses will eventually be built on it - at some point.

The land may be left unused or put to some meantime use, such as being used as a temporary car park. It may be held for a year or two or over several decades.

Recent research has shown that Britain’s biggest housebuilders own land bank plots with sufficient space to build over 441,000 new homes.

In the USA and other countries, land banking is sometimes described as a process where plots of low-value land are offered to small investors with the promise that their value will increase in future when they are built on. These schemes are often described as scams. For example, the land may be unsuitable for building on.

However, in the UK, the term land banking does not carry these connotations. Simply, it is land being held by developers to develop later.

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Scams in the UK

We said in the last section that land banking in the UK is not considered untrustworthy as in other countries: this needs more explanation because scams in the UK still happen.

Imagine a scenario when you answer your phone to find yourself talking to someone who wants to tell you about an exciting investment opportunity: you can invest in some land - not just any land but some land where planning permission is close to being finalised, that can only go up in value!

Have you already hung up?

No?

The conversation will now go down one of two paths...

Path 1

The first path walks you towards buying a plot of land that you could end up with, though promises about planning permission and future developments will be nothing but smoke and negated in the small print.

There is nothing illegal about companies buying and selling land they have a legal right to. What is more, land investments are not regulated by the Financial Conduct Authority: going down this path, you won't have access to the ombudsman or the compensation scheme.

In the unlikely event that you have received an offer like this and it sounds like a legitimate opportunity, then due diligence is a must. You should check with the local authority regarding planning permissions and residential planning. You should hire a financial advisor and a solicitor to look at the offer. You should research the company in question thoroughly.

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Path 2

The second path involves a collective investment scheme. This is a scheme whereby different investors can buy land as a collective. It is suggested to you, for example, that you invest only a few thousand pounds or even a few hundred. The advantage to this setup, you will be told, is that by joining with the crowd, you can achieve returns that previously only the wealthy could achieve.

In the UK, land investments are not regulated; collective investment schemes are. In other countries where this is not the case, land banking scams tend to take the form of CIS.

Regulation in the UK offers a layer of protection for consumers. While many unscrupulous companies will do everything to hide things like an underlying CIS in their business structure, consumers are still empowered by the regulation.

If a company contacts you, offering something that sounds like a collective scheme, you can look that company up and verify company standards.

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Don't Fall for It

Land banking as a concept doesn't have the reputation (a scam on retail investors) as elsewhere. This is mainly due to regulations curbing collective investment schemes. However, anyone with a phone can convince another person to part with their money. You should never make any financial decisions about something you were told when someone contacted you: you should always seek professional advice before diving into anything.

But while scams aren't so much the problem with land banking in the UK, that doesn't mean, as a practice, it's without its controversies.

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Why Land Banking Happens

There are several reasons why land banking occurs.

Firstly, it can be a way of investing or speculating in land for investment where land is bought and held in the hope that its value will go up over time. It usually does!

Secondly, it is a way of preventing others from buying and developing the land. For example, if a housebuilder buys (and banks) land in a particular area, their competitors won’t be able to buy it and build on it.

And thirdly, land banking can be used to push up land and property prices in an area. If there is a high demand for property in that area but less supply - because the land is land-banked - values will tend to rise. The land banker will see the benefit if and when they develop or sell the land.

Developers need a consistent pipeline of projects. They need to balance supply and demand. It is in their interests to ensure that the correct number of houses are on the market at any time. That there are neither too many nor too few. To this end, land banking is a method by which they can hold some land in preparedness for when needed. It helps them maintain a consistent pipeline.

Also, it might be impossible for the development company to develop the plot of land immediately. They could find themselves without the necessary funds, builders or materials. It makes sense to hold back until all resources are available.

And the planning process can be slow. Several years can pass between buying land and getting planning permission to build on it. Land can be ‘stuck’ in a land bank for this reason alone.

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Why it's a Problem

Land banking has a bad reputation, with some considering it to be no different to ‘land hoarding’. They say that land held in a land bank reduces the supply of available land for building new houses, which it does. This position is only a step away from the conclusion that it contributes to the housing crisis.

Of course, this is true as well. Land banking reduces the supply of available land and pushes up prices. The question is, to what degree are development companies doing this intentionally?

This brings us to the other side of the argument that land banking is simply part of how the development pipeline works. It is not a practice (in most cases) designed to manipulate market conditions but a necessary step in a process.

The Government has reviewed how the process of developing new houses operates. In 2018, the then Conservative MP Sir Oliver Letwin was commissioned to produce a report titled the ‘Independent Review of Build Out’.

This led to him discovering a problem regarding the time it takes to build new housing sites, driving up prices. However, he concluded that development delays were due to the rate at which new homes are made and sold. He said he did not believe land banking was a central concept in the business model of the large housing developers.

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The Land Banking Myth

Others went on to put the case more forcefully. In 2021 the Land Promoters and Developers Federation and the Home Builders Federation hired the planning consultancy Lichfields to produce a report looking into how development companies could meet government targets for 300,000 additional homes per year.

The Lichfield report called Tracking Progress highlights three main points:

The most significant barrier to delivering homes quickly can be found in the planning system, which is lengthy and procedurally inefficient. The local planning authorities will often fail to fulfil their responsibilities adequately.
Every development site has its own story to tell. There are always site-specific issues involving approvals, signing-off details, consultations and ownership that will compound together to slow work down.
Using a land banking strategy to manipulate the market is almost unheard of. Delays in development projects can almost always be explained as practical over speculative.

Andrew Whitaker, the planning director at the HBF, concluded: planning system issues remain the most significant barrier to the industry delivering desperately needed homes and the housing ambitions of the government.

To put it simply, land banking, according to Lichfield's report, seems a symptom, not a cause.

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Strategic Land Banks

However, there is more to this story. Above, we have defined land banking as land being held by developers to develop it in the future. They may be waiting for planning permission. They might be gathering the necessary human, financial and material resources together. In some cases, they may be simply sitting on the land to allow it to accumulate value. While the Lichfield Report puts this last idea to rest, many remain cynical.

However, with all this discussion around how quickly a house-building company can develop some land after they have purchased it, we are missing a crucial point: to control what happens with a piece of land, house-building companies don't need to own it, they need to have an agreement with the land owner.

So now we step into a world of option agreements and strategic land banking. An option agreement, in this scenario, is an exclusivity agreement where one party agrees to buy land at a pre-agreed price, either on a specific date or when a particular event occurs (for example, planning permission has been granted). The landowner will be paid a nonrefundable sum to take their land off the market.

Whether house-builders are using option agreements and strategic land banks to manipulate the value of a piece of land before building on it or not is impossible to say. There is no legal requirement for landowners or developers to register such agreements. It is, therefore, a murky area of the property industry. There is, however, some indication that this is a practice that is most prevalent in London.

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Community Land Trusts

Community Land Trusts are not connected to the concept of land banking. However, there is enough of a connection that the two things are often spoken about in the same breath. They both, after all, concern land ownership and development. If you are interested in finding out more on the topic, we've written about Community Land Trusts. Have a look.

But in a nutshell, a Community Land Trust (CLT) involves owning and managing land to benefit a local community. This might involve the stewardship of playing fields, allotments or nature reserves. It might cover buildings, such as community centres, post offices, pubs and sometimes residential housing.

Most often, CLTs are subject to an asset lock, meaning a legal agreement whereby the asset cannot go onto the open market. Rents tend to be locked, well below market value. The key watchwords are community and affordability. And they tend to be membership organisations under the democratic control of their shareholders/members.

The difference between a CLT and a land banking initiative couldn't be starker. There are many examples of Community Land Trusts being set up by residents to block the acquisition of a piece of land by a house-builder. And it is true to say that CLTs exist to disrupt the open market.

However, to compare a CLT with a land banking strategy is a false equivalence. There might be some similarities between the methods. But in terms of purpose, they are antipodean.

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Is Land Banking Legal? Will it be Banned?

Land banking is, of course, perfectly legal.

In recent years there have been suggestions from various parties that land banking could be made illegal. Such a ban would be introduced to ensure that more land is made available for building on, that more houses are built and that the housing shortage is reduced.

It has been suggested there should be a ‘use it or lose it’ policy where planning permission could be withdrawn or land could be compulsorily purchased from investors and developers if they do not build on it within a defined timeframe.

Another proposal suggests that developers and investors should have to pay a ‘build out levy’ or Council Tax on the houses that could be built on land banked land but which have not been. This might encourage them to speed up their processes.

The Government has also proposed the planning system could be changed so that all land is zoned into the land which can be built on without planning permission and land which cannot be built on. This would mean that land could be developed without the need for planning permission. It could speed up the new house-building process by removing one of the reasons land is held in land banks for extended periods.

None of these measures is due to be implemented at the time of writing. However, based on proposals in the Planning For The Future White Paper, a subsequent Planning Reform Bill could affect land banking in future.

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What Exactly is Land Banking? Buying Undeveloped Land

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