Option agreements blur picture on residential land

Copyright: David Lawson - Property Week 2001

Home Page

The foot and mouth epidemic is a last straw for many of Britain’s farmers. Local agents are reporting a flurry of instructions to find buyers for their increasingly burdensome acres. ‘The irony is that we can’t get out to many places because of movement restrictions,’ says one Midlands land agent. This ill wind might be expected to blow kindly for developers facing the longest upsurge in housing demand since the war.  But the land market is not that simple. Headlines  figures about supply, demand, and yo-yoing values hide a complex mix of factors. First there is the dead blanket of planning. The government is obsessed with forcing homes onto brownfield sites and have shown no sign of relaxing restrictions on virgin land to compensate for farmers’ losses.

  Builders are also surprisingly unimpressed. Experience with planning delays and market fluctuations over the decades has taught many to build strategic stocks rather than wait for windfalls. But they can’t afford to lay out vast sums on land which may not yield income for years, particularly sites which have no planning permission. This has led to increasing use of agreements where developers reserve the right to buy some time in future. ‘They are betting that restriction to brownfield sites cannot go on for ever,’ says Adrian Allen of Diamond Estates, a Northampton-based land agent and broker. He has just arranged an option for a major builder on the edge of Milton Keynes. The farmer will have plenty of time to arrange withdrawal as it lasts for 21 years.

  This kind of deal normally involves an upfront payment with periodic top-ups. Another kind of approach called a promotion agreement  involves the landowner keeping full title while the developer attempts to win planning permission. The two sides split the added value of the land.

 While many deals will be for much shorter periods, they still involve developers putting up money they may not recover and tie landowners down to a specific buyer, so they have become relatively complex as each side protects its interests. This has made the land market more difficult to analyse. No two agreements are the same, so the final price can be a dubious indicator, which is why overall figures on land values generally quoted in broad bands.  In any case, prices are rarely publicised. ‘I’m not telling my competitors what I pay for land,’ said one builder. ‘I might be selling bits on to them next week.’

  Everyone in the business will have a fair idea what has been paid, however. What they won’t know is the finer detail of increasingly complex option agreements which may involve dozens of pages of conditions and clauses.  Contracts can run anywhere between one and 100 pages, according to Steve Wiltshire of solicitor Shoosmiths.  Both sides jockey for position. The owner wants flexibility to claim back the land if circumstances change while the builder keeps payments as low as possible in case the gamble does not work out. The longer the term, the lower the premium.  

  ‘Dealings are far more sophisticated than 10 years ago,’ says Allen.  At one time a farmer might never sell land other than to other farmers. Valuations and deals were done through rural agents who  were often part of the same community.  The whole scene has changed as  owners have grown more aware of their power. But farmers now play a more limited role as a new class of seller has come into the market, says Ian Marris, residential development partner at Knight Frank. Privatised utilities and large industrial companies once left vast swathes of urban land fallow. Pressure from a disillusioned stock market have forced them into alliances with developers.

  Professional investors also became involved when commercial values dipped in the Nineties and made housing more attractive.  ‘Values have returned to the norm in town centres but this is still happening around the fringes of towns and cities,’ says Marris. A builder is more likely to be dealing nowadays with a seller churning a portfolio rather than a few dozen gallons of milk.

  This increasingly sophisticated market is a hothouse for specialist intermediaries who can do anything from sourcing land and clearing planning hurdles to negotiating complex option agreements. Either side can make a killing from the vast increase in value sparked by planning permissions. ‘Our key job is to ensure a fair division of rewards whether we are acting for buyer or seller,’ says Marris.

  While big names like Knight Frank play a key role in complex negotiations for regeneration sites, an army of  foot soldiers carry the action beyond the big towns and cities. ‘These are the guys who drink in the local pubs and watch football with potential sellers,’ says John Kerr, managing director of Bellway in the northern Home Counties.

  . Every major developer has a national network of contacts but no two will have the same needs. The agents’ skills are knowing who has money available, or a gap in their local coverage – even the kind of designs a local chief planner likes.  Chris Sommerfelt, land director at McCarthy & Stone, has a specific requirement  for sites of around an acre close to town centres, as the firm builds clusters of sheltered housing for the elderly. That puts him in competition with small commercial concerns like supermarkets and nursing homes, so he needs fast service to his chain of eight regional offices before land is snapped up – usually in off-market deals..

   The firm does not buy long-term strategic land banks, so it has little interest in options. Contracts are usually conditional on planning permission but Sommerfelt has his own experts to sort that out. It can still take an average eight months from exchange to consent, however, and more than a year for the 20% of sites that go to appeal.

  Option deals on bigger sites can face years of planning negotiations, and relationships can become fraught. This is where the unsung aspects of intermediaries’ skills become invaluable.  ‘Our expertise can come down to matching the personality of a seller and the managing director of a development company,’ says Allen.

 ‘They need to have the same attitude and be able to talk to each other.’  He brought in McAlpine Homes to a deal involving a new community of 750 homes near Kettering on this basis because it will be a long slog involving a phased purchase.    

  Kerr says he always asks potential partners about their aspirations so there is no   conflict later on. ‘Do they want quick cash or the maximum value from a site? At the end of the day, it is not always about getting the best up-front price.’

 This can be something of a shock to sellers, who can have unrealistic ideas about the value of their land, according to a study by Paul Syms and Peter Knight of Sheffield Hallam University for RICS Books. But they may have little room to manoeuvre where land based on historic valuations has  been used for collateral for loans  This is where the narrower skills of traditional land agents can run out and intermediaries earn their money structuring deals to suite both sides.