Land-led deals are on the rise, with more registered providers taking the plunge. Katie Fung, partner at law firm Devonshires, looks at the pros and cons
A growing number of registered providers have being doing land-led deals, with many attracted by the benefits of purchasing land and controlling a project from the outset.
Indeed, this has become possible because associations have been increasing their portfolio of skills in the past decade, with many hiring from the private sector.
However, land-led deals are not just the reserve of the larger housing associations. Smaller landlords are also getting in on the act.
The pandemic has shifted the focus of development away from cities, making land-led deals an even more attractive proposition.
So, what are the benefits of a land-led deal and what do you need to know?
The main reason housing associations have diversified in this way is that many have realised that they need to subsidise their affordable housing portfolio. To do that, they need to generate income either by way of sales or by renting private units.
With a land-led deal the undoubted attraction is that the profit margins are a lot higher. While the initial outlay for the land is clearly expensive, the profits should in most cases outweigh this cost significantly.
Additionally, you will also have more control over the design, the type of contractor, the development programme and the cost.
“With a land-led deal the undoubted attraction is that the profit margins are a lot higher”
But there are risks to be considered beforehand.
The land is going to be the most valuable asset in any deal, so having to buy that straight off is going to have an impact on cash flow – which is key for any registered provider.
Having control over who the contractor is has benefits, but you need to be sure that the firm is financially sound to complete the project.
You don’t really have a get-out-of-jail-free card when you are the landowner when things go wrong, so make sure you do your due diligence including any financial checks on your contractor.
This is crucial as things can get costly if a contractor becomes insolvent halfway through the project. Finding a new contractor to pick the project up halfway through is harder and can be time consuming, resulting in cost implications.
One thing to consider when purchasing the land is access to the building site. In this respect, it is essential to go and inspect the site beforehand.
When doing so, look out for access and any third-party rights that could affect your development proposal, such as established footpaths or gates on the boundary of the property, which can be a telltale sign that somebody is accessing it.
Are there any buildings close by that could be affected by your proposed development? If so, consider whether you need to consult a rights of light surveyor.
“One thing to consider when purchasing the land is access to the building site. In this respect, it is essential to go and inspect the site beforehand”
One final thing to consider is the potential tax efficiencies that can be made. Tax implications such as Stamp Duty Land Tax and VAT will need to be considered. A question to consider is: can the deal be structured in such a way to make it as tax efficient as possible for you?
The landscape of development has changed over the past 18 months with the focus on space outside of cities. As a result, I would expect more registered providers to embark on land-led deals in the near future.
While there are undoubted benefits to this approach, just make sure you follow a few simple steps to mitigate any risks.
Katie Fung, partner, Devonshires