Land Banking Profits during a Housing Supply Crisis – Englobo 2014

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by David Collyer
Policy Director

Land in Australia should be dirt cheap.  All levels of government must explicitly recognise outstanding access to land for all is a key national advantage that simply cannot be imitated by other countries.  For state governments, close scrutiny of planning and a review of exemptions from State Land Tax are fundamental to reducing land costs.

Listed property developers report their land holdings to the Australian Stock Exchange, which opens a window into the murky world of ‘englobo’ landbanking. Their 2014 annual accounts show they have 272,000 lots in development, with a disclosed end value of $81 billion.

Sharemarket-listed developers are a minority of developers. Their lot sales are around 25.7 per cent of the approximately 65,000 national residential land sales in the same period.[1]

Land banking – an especially damaging form of rent-seeking – is more prevalent where land supply is constrained and planning approval processes slow and uncertain. Land banking is also only profitable where the market price of land is rising faster than the cost of capital.

In Australia, land cost increases have four drivers:

  1. restrictive planning,
  2. the easy availability of credit,
  3. the speculative appetite of buyers, and
  4. taxes, notably who pays and where it is taken.

Government has an evergreen task ensuring developers cannot corner the market by confirming and reconfirming land supply is contestable – i.e. there is always the opportunity for someone further afield to compete on price and undercut. Planning constraints, like urban growth boundaries, reduce contestability and the ability of competition (or the threat of competition) to hold down prices. They effectively allow oligopolistic returns by conferring market power upon landowners.

Withholding vacant land from use displaces activity and drives up land costs – to the great advantage of all who own developable land. Central to affordable, available land is whether land owners on the fringe are allocating land to best use according to price signals; or speculating in an asset class rather like gold bullion – holding rather than selling land into use.

Land is finite. No more of it can be made. However, growing cities nip at the low-value agricultural land on their periphery and developers transform these broadacres into house parcels, building roads and installing utility connections.

But there is a dilemma: agricultural land advantaged by rezoning is immediately revalued by the market to final lot value less engineering construction cost and an allowance for interest costs on holding. Developers must straddle this intersection or become price-takers – like the homebuyers they plan to sell to.

Urbis examined the benefits in a study of properties of between five and 15 hectares around Wyndham, Victoria and found the following uplift in the price of land when re-zoned to residential from rural:[2]

  • Land outside but near urban growth boundary $50 000 – $100 000 per hectare
  • Rezoned urban growth zone away from existing development $250 000 – $400 000
  • Rezoned urban growth zone next to existing development $60 000 hectare

Landbank Duration

As a multiple of the past year’s sales, listed developers hold approximately 14.9 years supply. This is a significant reduction from 2013, where developer landbanks averaged 19.3 years.

The recent convergence of landbanks around the average 14.9 year sweet spot suggests this is where maximum landbanker returns are currently found.

Lend Lease significantly reduced its landbank from 33.3 years in June 2012 and 28.2 years in 2013 to 19.1 years supply by steadily increasing development and adding to its raw holdings with restraint. The company will no doubt argue other factors are at play, yet it is beyond question holding land against such very distant objectives is an investment without skill and a poor use of shareholders funds.

Queensland developer Sunland has significantly increased its years of supply by increasing landholdings – from 4.3 years in 2012 to 12.5 years in FY 2014

At the short end of the range, home builder AV Jennings holds 7.3 years supply, mostly for its own use.

Listed Developer landholdings

Company Lots Settled Lots in Development Disclosed end value Average lot value Land Bank Debt/ Equity[3]
2014 Number $ millions $’000 Years
Australiand[4] 1,287 19,450 7,500 259 15.1 34.6%
Sunland 446 5,556 3,200 174 12.5 19.4%
AV Jennings 1,254 9,214 7.3 20.3%
PEET 3,491 48,187 11,300 234 13.8 41.6%
Cedar Wood Properties >10,151 28.9%
Mirvac 2,482 30,538 12.3 45.8%
Lend Lease 3,425 67,560 37,700 558 19.1 32.5%
Stockland 5,219 81,510 20,400 250 15.6 28.5%
Totals 17,604 272,166 81,100 NC* 14.9[5]

Source: ASX Company reports
NC = not calculated

Developer Debt

Previous land price downturns have been characterized by developer bankruptcies as banks called loans to this traditionally highly-geared and strikingly illiquid industry. Economic history shows these downturns destroy land developers who misjudge economic trends and carry high levels of debt into land price corrections.

Australia’s listed developers have significantly and painfully reduced their debt since 2007 via capital raisings and asset sales. What little they do have is likely secured on their income-producing commercial and industrial properties.  Organisationally, they could easily survive a major land price correction, though shareholders equity will shrivel mightily.

Developer sought returns

Residential development at Stockland is around 20 per cent of its activities, yet the division made an EBIT profit margin of 23.4 per cent and a return on assets (ROA) of 12.2 per cent on core portfolio development. Stockland puts their workouts on impaired assets aside, and energetically points to a FY14 ROA on core projects of 18.4 per cent.

One wonders why it bothers with commercial (ROA 8.4 per cent) and retail property or retirement villages (ROA 4.5 per cent) when residential development can provide such stellar returns. Investor activists take note.

Planning

Planners err in thinking their rationing of urban land is a ‘flow control valve’ whereby the pressure on price can be carefully controlled. The reality is that they have an on/off switch for a nuclear chain reaction. This is why there are no urban economies that are just “slightly unaffordable”; data sets of median multiples (median house prices over median wages) tend to cluster around 3, and then around 6, with a tail going up to 12.

The removal or modification of regulatory constraints on the supply of land, along with more permissive planning policies and infrastructure provision, would increase competition amongst both developers and land owners, and limit their ability to ration sales and sustain high prices. Higher levels of competition would also deter land banking by increasing holding risk, as another nearby owner would always have the opportunity to offer into the market ahead of the land bankers.

While developers can rightly argue they are constrained by government planning controls, in practice, this is a feature not a bug. It provides an extremely high barrier to entry, confining development activity to those with deep, patient capital and the expertise to negotiate effectively with government – over years in some cases.

Land under restrictive planning conditions switches from being regarded as a resource to be allocated to best use by the market, to a speculative commodity where motivations become inverted; because once the prices have started rising, the incentive is to withhold it while prices rise some more.

In unconstrained markets, developers tend to just watch out for farms coming up for sale as farms, somewhere within a brief drive of the existing urban area. The turnover of farms tends to be high enough for developers to avoid door-knocking and begging land owners to sell. Instead, developers are forced by urban planning into a gladiatorial contest to outbid each other for uncommitted, zoned land.

Shrinking Lot Sizes

One of the few matters solely in the control of developers is the rate of release, drip-feeding sections at their preferred prices. Not content with this, developers have added a new wheeze: reducing lot sizes.

The argument floated around is that somehow all home buyers have abandoned the dream of a villa on a garden and now want a townhouse on 350 m2 – never mind it will be on the outskirts. In Melbourne or Sydney this could be 60 km from the CBD.

Smaller lot sizes are mainly achieved by reducing the depth of lots. Yes, the developer gets more lots per hectare, but must install more roads and utilities to achieve this. The loss of the prized Australian backyard and private open space will have major future social consequences.

Median combined capital city vacant land size (sqm)

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Land and Buildings

Australia’s residential property price bubble is a land-only bubble. Construction costs have not budged for thirty years, as the chart below makes abundantly clear.

Australians already enjoy spacious and comfortable housing. Imagine if we could back this with inexpensive land – as it was until the mid-1990’s.

Soos Residential land and dwelling values to GDP

 

State Land Tax

In one of the most anti-citizen regulatory changes I have ever observed, Victorian Planning Minister Matthew Guy recently issued a blanket exemption from State Land Tax for all land within Melbourne’s Urban Growth Boundary, even ‘shovel ready’ land in competed Precinct Structure Zones.[6]

The cost of freshly subdivided land on the outskirts of cities affects the market all the way to the centre.  SLT is a small but insistent charge prompting owners to put land into use. Minister Guy removed one of the few levers government has available to oblige developers to act.

Thus, The Great Australian Land Bubble goes on…

__________

Listed Developer Land Holdings June 2013

Company Lots Settled Lots in Development Disclosed end value Average lot value Land Bank Debt/ Equity
2013 Number $ millions $’000 Years
Australand 1,788 18,900 7,600 402 10.5 43%
Sunland 662 5,322 3,000 563 12.4 3.3%
AV Jennings 9,952 23.4%
PEET 2,091 51,173 10,500 205 25.5 47.6%
Mirvac 1,809 30,942 17.1 27.1%
FKP 242 4,250 17.6 38.3%
Lend Lease 2,468 69,631 37,400 NC 28.2 31.3%
Stockland 4,641 84,400 21,200 251 18.1 27.6%
Totals 13,701 264,618 79,700 NC 19.3

Source: ASX Company reports
NC = not calculated

Listed Developer Land Holdings June 2012

Company Lots Settled Lots in Development Disclosed end value Average lot value Land Bank Debt/ Equity
2013 Number $ millions $’000 Years
Australand 1,108 21,300 8.0 531 19.2 40.0%
Sunland 672 2,889 1.1 380 4.3 9.0%
PEET 2,052 34,000 6.2 182 16.3 56.7%
Mirvac 1,807 29,787 10.6 356 16.5 25.9%
FKP 410 4,725 1.4 287 11.3 NC
Lend Lease 2,059 68,006 13.0 191 33.0 30.6%
Stockland 5,388 87,900 23.0 338 16.3 30.8%
Totals 13,496 248,607 63.3 Av 18.4

Source: ASX Company reports

Footnotes

[1] As quantified by the HIA

[2] Urbis on re-zoning windfalls

[3] Debt Calculations include debt liabilities

[4] The takeover of Australand by Singapore-listed Fraser Centrepoint closed 5 September, with FCL owning 98.31% and expected to exercise compulsory acquisition rights.

[5] Landbank by years calculation excludes CWP.

[6] Matthew Guy’s Land Tax exemptions

3 Comments

  1. Steve31-10-2014

    Whenever this subject comes up the collective VI’s trot out the same routine over and over, ie, state taxes, cost of development blah blah blah but recently I just looked at some developed land in a regional centre 3hrs from Melbourne, 700+ sqm blocks from around $100K. Now the thing is, it would have been the same taxes and development costs to produce this manicured building land as it is on the city fringes which to my mind completely negates the usual excuses. And to top it off, I assume the regional land had generated sufficient profit for the local developer and the farmer who sold them the land, dito the government and its taxes.
    As it stands, I don’t see how a 300m block of land 50kms from any city centre can cost $200k ++ when to build a house on it costs somewhat less when in fact the effort that goes into building the house is far higher and requires far more skills and materials than plonking down a bit of road and some sewers etc
    I often bring this up with land sellers (their salesmen) and their eyes glaze over as if I am talking a foreign language to them.

  2. AJ31-10-2014

    Vic state govt mandates minimum15 lots per developable ha in new subdivisions within the UGB and are pushing for this to be increased to 18 lots per ha.When you allow for land used for parks,roads,footpaths etc you are going to end up with an average lot size of around 500m2 which is about half the size of the old quarter acre lot.
    In the Urban Growth Boundary the Srate Govt taxes developers via the Growth Area Infrastructure Charge which is about $100000 per developable hectare and Councils in the UGB tax developers around $250000 per hectare.Developers are also required to develop and maintain parks for at least 2 years before they are handed over to council free of charge.All up construction costs ,including aforementioned taxes ,per lot are typically $80000 to $100000. 10 ha and larger sites that are zoned and can be subdivided within 3 years and are within the UGB typically sell for between $600000 and $1000000 per ha.Add on the cost of finance,land tax(contrary to the article developers are not exempt from land tax),council rates,advertising,real estate agent fees etc and the cost to bring a lot to the market quickly gets to around $150000.

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