Land led deals – what you need to consider

Land led deals are on the rise, with more registered providers taking the plunge. Katie Fung looks at the pros and cons.

Land led deals have been on the increase for registered providers (RPs) in recent years with many housing associations realising the benefits of purchasing land and being in control of the project from the outset. Indeed, this has become possible because RPs have been increasing their portfolio of skills in the past decade, with many hiring from the private sector. However, land led deals should not be the reserve of the larger housing associations with smaller RPs also getting in on the act. The pandemic has shifted the focus of development to outside 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 RPs have diversified in this way is because many have realised that they need to subsidise their affordable housing portfolio and to do that they need to generate income either by way of sales or 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.

There are of course risks to be considered before embarking on a land led deal. 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 RP. Having control over who the contractor is has benefits, but you need to be sure that the contractor 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 for an RP 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 so it is essential to go and inspect the site before purchasing it. When doing so look out for access and any third-party rights that could affect your development proposal, like established footpaths or gates on the boundary of the property, which can be a tell tail sign somebody is accessing the property. 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 final thing to consider is the potential tax efficiencies that can be made and tax implications such as SDLT 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 RPs 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 is a partner at Devonshires.