(Bloomberg Gadfly) -- Houses are made of bricks and mortar, but a builder's key raw material is land. Once, its value roughly tracked house prices. But that relationship has broken down, much to the benefit of the large homebuilders.
In conversations with analysts and investors, developers like Taylor Wimpey Plc, Crest Nicholson Holdings Plc and Redrow Plc have continually alighted on the same word -- "benign" -- to describe conditions in the land market, outside London at least. Some of them can barely believe their luck.
Taken with the government's efforts to spur mortgage lending and help first-time buyers, this price divergence has helped to fatten homebuilders' profit margins -- enabling massive payouts to shareholders and top management. Dwindling competition for parcels of land may explain why the largest players have rarely had it so good.
Though the big homebuilders moan about the U.K.'s expensive and time-consuming planning process, the availability of land has improved lately. Local authorities have been forced by central government to identify sites that could provide five years of housing supply.
Homebuilders have also had better luck in getting planning permission for land that didn't previously have it. So-called strategic land is cheaper to acquire, so homebuilders reap a bigger profit if they get permission to build on it. More than half the houses Taylor Wimpey completed in the first half of 2017 were built on land from its strategic pipeline.
The increased use of strategic land also means there's less pricing pressure in the market for land that already has planning consent, according to analysts at UBS.
The consolidation of the housebuilding industry has also limited competition for land. Smaller contractors lack the capabilities needed to navigate the complex planning process or afford to bid on the large plots that are typically made available by local authorities. Many have exited the industry altogether.
Combined with high houses prices, the benign land market has turned building houses into a license to print money. Indeed, when questioned by lawmakers in 2016, Taylor Wimpey CEO Pete Redfern wondered why more companies weren't entering the industry.
It's an invitation others should heed. Though shareholders would doubtless disagree, a bit more competition to build houses could be just what's needed to fix Britain's housing shortage.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.
To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net.
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