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Land banking logic

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Further to my post of two days ago

Let’s assume in their neo-lib fantasy world, we abandon planning restrictions and everything in a radius or two or three miles around each town is zoned for residential development.

For simplicity, let’s assume that all land in this zone is owned by one feudal landowner, who hitherto has just been selling off the odd acre here and there to developers to expand the town. Which is exactly what Prince Charles and his ancestors have been doing for centuries. His ancestors were doing this long before they invented planning laws, and if he really wanted planning permission, does anybody think he wouldn’t get it?

Why does he drip feed it? To maximise the total value that he and his heirs can wring out of it. He might sell off the most valuable fraction of a percent each year (the parts immediately adjacent to the towns) but his remaining land, in particular the bit that is now adjacent to the expanded towns, goes up in value by a larger percentage.

Does the fact that he could theoretically sell all his land to developers or anybody else tomorrow mean that he will do so, and that tens of thousands of homes would be built? No, why would he? Developers have a steep input cost curve, if they try and increase output, their input costs rise dramatically, which reduces their gross profit, which reduces the amount they are prepared to pay for land. And they don’t want to depress selling prices short-term by flooding the market. So they are only prepared to pay full price for small amounts of land each year.
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Does it make much difference, if any, if the land surrounding the town is divided into smaller and larger farms, each with a different owner? No, why would it? Collectively, their wealth-maximising strategy is to do the same as the monopolist, i.e. drip feed it, starting with the most valuable bits.

Let’s look at three farmers who are thinking of offering some land to developers.

1. Farmer A owns land adjacent to the developed area, the developer can build ten homes per acre, input costs £100,000, selling price £250,000, developer expects £50,000 profit per home, so he is prepared to pay max. £100,000 per home for the land = £1 million per acre. Farmer A can hang on as long as he likes, it will only go up in value relatively gradually as it can’t get any closer to the developed area.

2. Farmer B owns land a mile out of town, same maths as above, but it will cost the developer an extra £40,000 per home to build/widen the narrow track out of town (or pay the council to do so under a s106 agreement) and connect it up to the normal utilities a mile away (water, sewage, utilities, internet etc), which will involve also sorts of hassle, costs, ransom and wayleave payments. The developer is only prepared to pay £600,000 per acre for this land.

3. Farmer C owns land two miles out of town, it will cost £80,000 per home to hook it up to the town two miles away, developer is prepared to pay only £200,000 per acre.
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Which Farmer is most likely to sell and/or which land is a developer most likely to buy?

1. Farmer A has an offer of £1 million on the table and that land has reached its maximum value, it will only go up slowly in future.

2. Farmer B has an offer of £600,000, but if the town expands a mile towards him over the next decade it will be worth £1 million. So if he hangs on for a decade, his compound growth is 5% per annum. Maybe he wants to sell anyway, but whoever buys (another farmer, a developer, a speculator) will probably decide to hang on and bank the 5% compound.

3. Farmer C has an offer of £200,000. If he is lucky and the town expands towards him, in thirty years it might be worth £1 million. So if he hangs on for thirty years, his compound growth is also 5%. Maybe he wants to sell anyway, makes no difference, same as 2.
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So Farmer A is most likely to sell, and whoever buys it might as well get those new houses up and get his money back ASAP, there is no advantage to hanging on. This also happens to be the most efficient strategy in economic and environmental terms as well (more car use, more land being covered with roads etc).

While the developer is busy building and selling these homes, no developer is going to be particularly interested in buying land from Farmer 2 or Farmer 3 – they’d risk having to sell for lower prices and will face higher input costs (on top of the high connection costs).



Source: http://markwadsworth.blogspot.com/2021/06/land-banking-logic.html


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