[+] Landbanking Brings No Advantage, Developers Told

Landbanking has been labelled a “ticking time bomb”. Media outlets regularly report about the residents’ fears that developers are sitting on land, hoping for the value to increase, and denying appropriate and timely development. According to a 2020 report, Time is Money: How Landbanking Constrains Housing Supply, published by the Journal of Housing Economics , there could be some truth to that. The report estimated 200,000 Australian housing lots were being held in landbanks by the eight largest housing developers, and argued that they “routinely delay housing production to capitalise on market cycles”. Big claims, but the idea of landbanking actually comes down to intention rather than statistics, according to Charter Keck Cramer national executive director Richard Temlett. “There might be one or two bad apples that give the industry a bad name, but it’s not in a developer’s interests to landbank,” Temlett says. ▲ Landbanking works against the development industry’s attempts to meet the National Housing Accord’s target for 1.2 million new homes. That’s not to say that developers have land in their possession that they aren’t developing just yet, for various reasons, rather that landbanking or “landhoarding” implies that the land was bought and held in an efforts to benefit from land valuation increases, rather than as a response to difficult economic circumstances, he says. “You can’t define what is happening as landbanking—if we can’t proceed it’s because it doesn’t stack up financially and we’re holding on for dear life,” he says. Not financially feasible Avid Property Group executive general manager Bruce Harper agrees, and says that financially, the practice doesn’t make sense. “For some time, there has been a myth running that developers landbank land,” he says. “This comes from the fact that there is a lack of supply and therefore rising prices for land and houses. But it’s a myth because from a large-scale land perspective, it’s not financially feasible to landbank. “Basic financial analysis will show that the cost of buying land and paying interest on the value of that land and the opportunity cost of not developing it, including other charges you pay to hold on to it, is poor in comparison to developing land.” But, given that there are an estimated 1.3 per cent (140,000) homes vacant in Australia , it seems likely that at least some are being held for speculative future gains. --> Clearly governments believe landbanking is happening—Victoria last year introduced an expanded vacant land tax that will come into effect from January next, expanding the 1 per cent tax for properties vacant for more than six months to cover all residential land across the state. As well, it will double each year for three years, that is, to 2 per cent in the second year and then to 3 per cent for the third and subsequent years. ▲ Avid has 45 projects in near-city and regional locations in Queensland, Victoria and NSW. But for many developers, holding on to land indefinitely in the hope market conditions improve is a practice that wouldn’t hold up financially regardless, Temlett says. “You’re not a good developer if you buy sites and sit on them. As a developer, you often buy that with debt,” he says. “If developers are not moving on their projects they are getting pressure from their financiers—if they have four or five sites they are not moving on, they will be pressured to sell and recapitalise the portfolio. “I’d be very surprised if financiers would support [landbanking].” Planning arguments An argument developers often, and rightly, use to justify land being left undeveloped is that rezoning and planning takes time, making vacant and undeveloped land inevitable, at least for a period. “The [landbanking] myth comes from the idea that someone might look at a map and say, ‘This company owns that land and they’re not developing it’,” Harper says. “The first answer is that it takes so long to get rezonings and approvals, and the second reason is that people might look at large holdings ... [and ask] why aren’t you developing it? “Well that’s because you might own 400ha of land and you simply cannot develop it all at once.” ▲ Substantial greenfield development such as Mirvac’s Oran Park and Gledswood Hills can take years, even decades, to rezone and develop. Availability of construction materials and skills shortages are also holding back projects, which should not be blamed on landbanking, Harper says. Temlett says the planning system discourages landbanking. “Permits are often two years, and you can sometimes apply for extension if you have excuses, but still there are timelines to push things through,” Temlett says. “The government is understandably saying, ‘We’re frustrated, we’ve changed planning and developers aren’t developing’. But they are not proceeding because building costs have increased so much and sales prices haven’t increased enough to cover the build costs.” Predatory landbanking But intentional and predatory landbanking, or at least holding on to land for strategic purposes beyond building homes or other developments, does exist. “The bad apple analogy is one I’d apply here. If you have one bad apple, it’s not the whole barrel,” Temlett says. “It occurs every now and then but it’s more a function of change in economic cycles and having to wait for the right point in the cycle. “Right now, and it was the same thing in the GFC, and also during Covid, or any liquidity or credit crunches, it’s the wrong point in the cycle.” Vacant land settlements across the eastern states: 2023 ▲ Source: PEXA Residential Land Report 2023 High interest rates are making presales—often needed to secure financial backing—as well as holding costs even more difficult to manage. “There would be some that make money but it’s not what you hear in the media—doubling or tripling your money. It’s very rare and its by accident, honestly,” Temlett says. “In fact, a lots of times they don’t make money, and instead of hearing about that, they might go insolvent.” Insolvency proceedings then wrap the land up in administration, until insolvency practitioners can offload it, often to pay back creditors. Weak land supply in some states—including NSW that had about 16,000 vacant land settlements in 2023 compared with Victoria’s more than 33,000 transactions—will only make land more valuable, not to landbankers but to developers keen to get to work. Harper says the bottom line is that it’s just not in the interests of developers. “I can’t speak to everyone, and small landholders might buy it on the expectation that it will be worth more in a year, but that would be such a small percentage of the marketplace, because most of the land is developed by large, publicly listed companies,” he says. “It’s really a long bow to draw that says every bit of land not being developers isn’t being developed for a nefarious reason. “Developers are developing as fast as they can. There’s a demand greater than we can supply, so it’s not in our interests to hold land, it’s in our interests to get approvals as soon as possible.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

Residential
Clare Burnett
Fri 09 Aug 24

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