The Competition and Markets Authority (CMA) has published an update on its market study into the housebuilding sector, identifying particular issues with land banking and private management of public amenities, which may be referred for a more thorough market investigation.
The market study
We previously wrote about the launch of the CMA's market study here. Where it undertakes a market study the CMA is required to make a decision, within six months of launching the study, to either make a market investigation reference or consult on a proposal to make a reference. Following a recent Competition Appeal Tribunal judgment the CMA has changed its approach in cases where it identifies concerns at the six-month stage, and has now opened a consultation on a proposal to make a reference in relation to all five features of the housebuilding market that it has identified as giving rise to potential concerns:
- Land banking (and in particular whether the concentration of ownership of "land banks" in certain areas distorts competition in local markets);
- Private management of public amenities (locking residents in to estate management arrangements that can be opaque and hard to change);
- Planning rules that are complex and frequently changing and therefore difficult to navigate;
- Market competition (including challenges faced by SME housebuilders); and
- Barriers to entry and expansion (again, particularly for SME housebuilders).
All of these will now be subject to further scrutiny as the CMA considers whether to refer any or all of them for a more thorough market investigation, which can lead to the CMA imposing legally binding remedies, including orders regulating the behaviour of market participants and even requiring the breaking up of certain (usually the largest) market players.
Where the CMA considers that competition problems in a market are more appropriately dealt with by recommendations to government (for example, where the issue arises from the way the law works in a given area) it can decide not to make a market investigation reference. Problems that the CMA has identified with the planning system (and its effect on market competition and barriers to entry) may lead to recommendations for reforms to planning laws.
The two areas where the CMA considers that it is likely that a market investigation will be required are land banking and private management of public amenities.
The CMA has identified concerns that competition may be distorted where land is held for longer and in larger quantities than is necessary for the management of development pipelines, and is particularly concerned with the effect of large land banks on local markets – for example where a significant amount of developable land in a particular area is owned by one or two developers. It is, though, also considering whether land banking is a product of flaws in the planning system – in which case it is more likely to recommend further changes to planning laws than to impose orders to divest land holdings.
Private management of public amenities
The CMA has noted an increasing tendency for public amenities such as roads, open spaces and drainage systems not to be adopted by local authorities but rather left for private operators to manage at the expense of residents. Three features have been identified as concerns:
- a lack of transparency for house buyers about their obligations, costs and how estate management companies will be engaged;
- significant market power held by estate management companies as a result of the way in which they are appointed by developers; and
- significant barriers to consumers switching management company and inadequate rights of residents to challenge the reasonableness of management decisions and costs.
Again the CMA has indicated that it may recommend legislative changes to deal with these issues, but a market investigation would allow it to impose further regulation directly, for example by forcing estate management companies to submit to new codes of practice or ombudsmen.
The CMA is now seeking comments on whether to refer the housebuilding market for a full market investigation, until 18 September 2023.
We are happy to help with the drafting and submission of a response to the consultation or, in due course, with responding to a CMA questionnaire. For any assistance with the process, please contact Charles Livingstone, Jamie Dunne or your usual Brodies Housebuilding team contact.