What is Land Banking in the UK?

We’ve all seen a random plot of land, which seemed unused and undeveloped. Then, years later, when you revisit, it’s surrounded by shops, and homes, and has even become a part of the urban infrastructure.

This transformation often involves land banking, where you hold undeveloped land while it grows in value. 

Most investors have realised this potential, driving up land banking by 67% since 2013. But in the UK, where housing shortages are a serious issue, this practice comes with immense scrutiny from the public and the government.

In this blog, let’s explore the essentials of land banking and whether you should consider land banking in the future.

What is land banking?

Land banking is a process of purchasing and holding undeveloped land for future sale and development. This practice is typically used by property developers, investors, or even governments. Land banking is typically practised for locations that are undeveloped and affordable.

For example, an investor can purchase a plot of land strategically, and at a lower price, with the hope for appreciation in value. Usually, the land value does go up with time owing to urban development, growing infrastructure, and market changes. The plot can be sold at a much higher price for profit, or it can be developed for business advantages.

What is the purpose of a LandBank? 

Think of land banks as portfolios of land that are being held onto. When an entity or an individual purchases a plot of land, they “bank” it. Meaning, that they hold onto it to develop the land in the future or wait for its value to increase before selling it for a profit. 

The main purpose of a land bank in the UK is to strategically hold land to develop in the future while meeting regulatory requirements. Others include:

• Acquire land in growing or high-demand areas 
• Secure land for future development, be it residential or commercial 
• Manage undeveloped land until proper use is identified 
• Hold land for capital appreciation 
• Manage risks by diversifying land holdings in terms of locations or sectors 

Pros and cons of land banking 

Land banking attracts investors and entities who want to purchase undeveloped land and sell it at a higher price when the right time comes. 

However, it is not without its own disadvantages. Let’s briefly explore them below:

Pros of land banking

1. Potential for high appreciation

Strategic locations, like areas with planned infrastructure developments or growing housing demand, see a huge increase in land values. This makes it an attractive choice, offering long-term capital growth and appreciation over time.

2. Low maintenance investment

Unlike rental properties or commercial buildings, land banking has minimal costs. There’s no need to manage tenants or even deal with repair costs. 

3. Protection from inflation 

Land’s value tends to rise with inflation. This means, investors can protect their wealth from the increase in cost of living, as land values outpace inflation over the long term.

4. Flexibility for future development 

Depending on zoning laws and permissions for planning, land banking provides future development opportunities. Buyers or investors might decide to sell the land to developers or work on projects, multiplying returns even further.

5. Lower initial entry cost compared to developed property

Buying undeveloped land generally requires a lower cost compared to purchasing a developed real-estate. This is an amazing option for new investors or those looking to diversify their portfolio without huge capital.

Cons of land banking

1. No immediate income

Purchasing or holding onto a land for a long time means buyers cannot receive rental income or cash flow. They must rely on capital appreciation that may happen a long time from present, making it less appealing for those looking for steady returns.

2. Holding costs can add up 

While practising land banking involves lower maintenance costs, holding onto land for extended periods still involves property taxes, legal fees, and administrative expenses. These costs may reduce profitability.

3. Market uncertainty 

The value of land relies heavily on local infrastructure projects, economic growth, or changes in regulation planning. This means, if these factors don’t improve positively, the land’s value may reduce or stay the same.

4. Difficult to find profitable locations

Not all land banking opportunities are equal, and the UK’s planning system is complex. Investors need to carefully research locations to make sure they provide genuine appreciation.

Is land banking legal in the UK? 

Yes, land banking is currently legal in the UK. However, it’s considered somewhat unethical by the government. This is because there’s a surge in housing demands in the UK, and with multiple plots of land being held by various investors, it affects the housing economy.

It contributes to housing shortages and reduces the revenue potential in the form of taxes. As such, the government is already taking steps to tackle this issue.

The Levelling Up and Regeneration Act 2023 (LURA) replaces the existing system of Section 106 agreements and the Community Infrastructure Levy with a new mandatory Infrastructure Levy. It aims to support housing projects and property developers. What it means for investors:

• Increased costs through mandatory Infrastructure Levy
• Required support for development plans due to Completion Notices 
• Fines and penalties for non-compliance with Commencement Notices 
• Reduced ability to hold land longer without disclosing agreements 
• Shift from long-term profits to development-driven returns 

Another key land banking law to be aware of in 2024 is the planning system reforms featuring the National Development Management Policy (NDMP).

Here’s what it means:

• Inability to exploit loopholes for profits 
• Reduced delays that land bankers might utilise to inflate prices 
• Prioritising active land developments 

There are also certain investigations and reviews performed by the CMA (Competition and Markets Authority) in 2024. It has paused direct action against land banking and called for systemic reforms to promote housing development. 

What are the main risks and challenges of land banking in the UK?

With the changing laws and expectations surrounding land banking in the UK, there are some major risks and challenges of land banking. 

1. Changes in planning regulations

Investors in land banking may face sudden regulatory changes that may reduce development opportunities, or even prevent it. Hence, they might be unable to develop or sell land as intended. The sudden policy changes also restrict capital appreciation on land. 

2. Slow or delayed development permissions 

The planning application process in the UK can be slow in high housing demand areas. It leads to delays in receiving planning permissions, and hence investors could be left holding land for years without any progress towards resale. This increases opportunity costs and holding expenses.

3. Environmental impact and sustainability concerns

There’s also growing pressure on landowners to think of the environmental impact of their developments. This can also delay planning permissions and additional costs for conducting environmental impact assessments.

4. Market fluctuations 

Market fluctuations like economic downturns, changes in interest rates, and changes in housing demand affect land prices. Investors may struggle to sell or profit during market slumps. 

One way most investors tackle this is by diversifying their property portfolio across different property types and locations.

5. High holding costs 

Landowners in the UK must deal with ongoing costs such as council tax and even maintenance costs for managing undeveloped land. Without proper market research, these holding costs accumulate over time and reduce profitability.

These costs change based on:

• Property taxes 
• Legal fees
• Security 
• Interest payment on loans taken for purchase 
• Maintenance 

1. 6. Delayed housing development and increased costs

Land banking contributes to the delay in the construction of much-needed housing in the UK. When developers or investors hold onto land without developing it, it adds to the housing shortage. 

This increases legal and public scrutiny. Also, by holding land, the prices increase—making it more difficult and expensive for developers to acquire plots to build housing projects. 

This delay in housing development worsens the already tight housing market, thereby increasing prices. It can also lead to a situation where in the area, the housing demand exceeds supply. 

2. 7. Liquidity issues

The land market is less fluid than other property sectors as it takes a long time to sell it. Investors may face a long waiting period of time before they can see the investment happen, which ties up capital. This becomes frustrating if there’s no immediate ROI.

3. 8. Speculative land banking regulation 

As discussed above, the UK government has been tackling speculative land banking with new laws, such as the mandatory Infrastructure Levy and the Register of Contractual Controls. 

This discourages landowners from holding land for speculative gains. They may also face penalties or legal actions if they are found to be holding onto land with no clear plan for development. 

4. 9. Zoning and land use restrictions

Land that seems like a good investment can have zoning restrictions, making it unsuitable for intended development. These restrictions come from planning laws or area designations.

Such restrictions prevent the land from being developed as desired, leading to wasted investment. 

5. 10. Possible unforeseen legal liabilities

There might be unexpected legal or tax liabilities that come up after purchasing land. This includes ownership disputes, historical rights, or tax increases. It can take a long time to resolve along with some financial costs, making the investment a bit unprofitable.

How long can land be “banked” in the UK?

In the UK, land can be banked for 3 to 5 years before planning permission expires or extra costs and regulations begin to apply. While the planning permission lasts for three years, during which development must begin. 

If not, developers can apply for extensions; however, approval is not guaranteed. 

Reforms like the Levelling Up and Regeneration Act 2023 and possible tax penalties on unused land are reducing the practical holding period for speculative investors. These measures, along with growing government scrutiny, make long-term land banking challenging nowadays.

Who typically engages in land banking?

Those who typically engage in land banking include property developers, investors, institutional investors, and speculators. They look for long-term returns and bank land to capitalise on future appreciation, urban development, and other community improvements.

They typically look for land in areas with high growth chances or where planning permissions may increase value. Investors or buyers prefer lower investment costs, instead of waiting for capital gains.

Could land banking be banned?

Land banking will either be banned or restricted in the UK in upcoming years. This is considering the ongoing debates around housing shortages and land speculation. 

The Labour’s current housing proposals include a strong focus on reforming the planning system. Their plans address land banking indirectly through measures like handling underused land and reducing the delays in building the necessary infrastructure. 

Labour is also pushing for regional planning and funding for local authorities to address land development bottlenecks or blockers. 

And hence, they aim to take tough action on land that’s not being developed in a timely way, creating pressure for developers to move projects ahead. However specific policies targeting the practice of land banking haven’t been laid out.

Why do developers engage in land banking?

Developers engage in land banking to acquire land at current prices for future projects. This ensures a consistent pipeline of land for development. It also reduces risks from land value fluctuation and delays in acquiring planning permissions. Land banking also provides flexibility to respond to future housing demands or changes. 

While the UK government discouraged speculative land holding, many continue this practice. They do land banking as a way to protect against market uncertainty, particularly in high-demand areas where land supply is low. This approach supports long-term profitability.

How does land banking affect property prices?

Land banking increases property prices. As of September 2024, the year-over-year increase in property prices was 2.9%. Land banking limits housing supply and drives up prices higher. 

For example, the average UK house price has increased to 8.24 times the annual earnings, compared to just 3.54 in 1997. Land holdings by housebuilders have also increased by 67% over a decade, with large developers controlling supply. 

Final takeaway— Should property investors follow land banking in the UK? 

Property investors should cautiously follow land banking in the UK. While it definitely offers financial gains through rising land values and the possibility for development, increased government scrutiny and reforms make land banking riskier. 

Since many critics link land banking to restricted housing supply and inflated prices, it fuels public and political opposition. To tackle this, property investors must align with the government’s housing goals, prioritise brownfield developments, and focus on socially responsible projects.