A look at the CMA's probe into the housebuilding sector

'To investigate a problem is indeed to solve it' – Mao Zedong. As solving the housing supply problem may be rather harder than Mao's quote suggests, Fieldfisher's real estate specialists take a look at the potentially far-reaching effects of the CMA's probe into the housebuilding sector.

The Competition and Markets Authority (CMA) formally commenced its market study into the British housebuilding sector on 28 February 2023. On opening the inquiry, CMA Chief Executive Sarah Cardell said, "the quality and cost of housing is one of the biggest issues facing the country".

The market study seeks to address concerns surrounding housing availability and cost, in response to concerns that housebuilders are not delivering homes at an adequate pace or scale.

Market background

Over 205,000 new homes were built in 2021-22 in the UK according to government statistics. This is equivalent to approximately 18% of all residential homes sold in the UK in that year.

Of these completions, the private sector made up 80% with the remaining 20% being made up by the public sector.

The UK's housebuilding market is comprised of large housebuilding firms operating nationwide, and smaller firms operating in local areas. The five largest firms are estimated to have built just over 30% of new houses in the UK in 2021.

In England and Wales, the share of supply small- and medium-sized (SME) builders accounted for has declined significantly, from 39% of new homes built in 1988 to 10% in 2020. The share of supply accounted for by small builders (firms building fewer than 100 units) also declined, from 28% in 2008 to 12% in 2015.

Market studies

Market studies are one of the CMA's various tools under their general review function (granted by section 5 of the Enterprise Act 2002) to address problems relating to consumer protection and competition.

The CMA has statutory information-gathering powers to investigate the market. They examine causes of ineffective markets, taking into account regulatory and economic factors, as well as behavioural patterns of consumers and businesses.  

The outcome of this market study could include:

·                       A "clean bill of health";

·                       Recommendations for actions to improve consumers' access to information;

·                       Encouraging the self-regulation of businesses;

·                       Making recommendations to the Government to change regulations or public policy;

·                       Taking action to enforce consumer or competition law against firms; and

·                       Referring this to a more in-depth (phase 2) market investigation.

Timing and Geographical Scope of the CMA's market study

The CMA must undertake the study and publish its report outlining its findings and proposed actions (if any) within the statutory time limit of 12 months, so time is already ticking on its report on the housebuilding sector.

Geographically, the market study will examine the English, Scottish, and Welsh markets. Northern Ireland is excluded because its market situation is significantly different from the rest of the UK.

The focus of the CMA's review is on 'housebuilding', specifically, the supply of new homes to consumers.

Elements of the market study

The CMA's market study comprises of three elements:

1.       Understanding the characteristics of the market across the supply chain

This is to determine whether there are competition issues, the characteristics of the market including the number and size of participants, their role within the market, and their business models. The market's dynamics will be assessed at each of the four key stages:

                       i.            Identifying and securing land for development;

                     ii.            Obtaining planning permission and putting agreements in place with local authorities;

                   iii.            Constructing housing to accord with planning permission; and

                    iv.            The marketing and sale of new houses.

This will include an assessment of the market's structure, including trends in the share of supply by small and medium enterprises and reasons for this.

2.       An assessment of potential issues distorting competition

Based on concerns raised by stakeholders, the CMA has identified the following potential issues distorting the market:

                       i.            Whether the behaviour of market actors leads to unnecessary costs or distortions in the market. This includes:

a.       The lack of clarity over the business models of some intermediaries in the land market and the effect of intermediaries on land transactions and subsequent development. Interestingly, a particular concern flagged by the CMA is the situation where land promoters agree to outline planning permissions which are subject to conditions that are undeliverable at the land's sale price, leading potentially to stalled permissions and the need for Government support for infrastructure and affordable houses.

b.       Concerns around the interaction between land pricing and the planning process distorting incentives of housebuilders when negotiating planning conditions and the prompt delivery of the development.

c.       Whether Local Planning Authorities (LPAs) are incentivised to prefer larger developers over smaller ones to meet supply targets, distorting competitive dynamics;

d.       Whether this reliance on large developers, in turn, diminishes the LPAs' bargaining power when negotiating planning conditions.

e.       Potential unnecessary costs and delays in the planning process generally, which arise out of opposing incentives and actions of negotiators (e.g. local authorities, housebuilders, or land promoters).

f.        Whether the process of adopting roads and public amenities deters housebuilders and local authorities from entering into agreements due to economic considerations.

                     ii.            Whether there is sufficient transparency at key stages in the housebuilding process for buyers to exercise effective choice. This includes:

a.       Land market: transparency in land availability for sale and relationships between established housebuilders and landowners/intermediaries, which may limit access to land (as it is not necessarily openly marketed for sale).

b.       Sale of houses: transparency surrounding estate maintenance charges and freeholder obligations where roads and public amenities have not been adopted.

c.       Management companies: transparency around the appointment of management companies for freehold estates.

                   iii.            Whether there is effective competition between housebuilders, including:

a.       Whether housebuilders face weak competition at point of build-out. This involves an understanding of the housebuilder's concentration at a local level.

b.       Whether established housebuilders' control of large land banks enables them to exclude other builders, thus strengthening their local market position.

c.       Whether there are barriers to entry and expansion preventing new entrants from entering the market thereby limiting the volume and diversity in the market. Potential reasons include:

                                                                             i.      local authorities favouring particular categories of housebuilders through their processes;

                                                                           ii.      planning processes and regulatory requirements disproportionately affecting smaller housebuilders due to a lack of resourcing of local authorities; and

                                                                         iii.      limited access to resources such as land, labour, materials, and finance disproportionately affecting smaller builders.'

3.       Analysing potential consumer detriment

The CMA will assess the impact of the competitive process on consumers to determine whether there is any distortion to competition and, if so, the extent of harm to consumer welfare.

Considerations include the supply (volume of new homes built), choice and quality of new-builds, and innovation of design and construction. The CMA seeks to understand the role of diversity of supply, particularly, of SME housebuilders and their impact on quality and innovation.

Price and profitability within the market will also be assessed. However, given that pricing is driven by factors beyond levels of housebuilding, the CMA will instead consider the way in which prices are set and whether this is affected by the price paid for land, price projections when the development is first conceived, and local market conditions at the time of construction.

Next steps

Comments on the statement of scope of the market were invited by the CMA by 20 March 2023.  However, anyone wishing to submit reasoned comments to the CMA on any of the issues under consideration may continue to do so after that date.

The CMA is also likely to start exercising its formal information-gathering powers, so housebuilders and firms operating in the market can expect to receive questionnaires from the CMA requiring the provision of information to inform the market study. 

It is possible that some entities or individuals may be asked to attend meetings with the CMA.  Failure to comply with request for information or attendance can lead to fines so it is important to deal promptly with any communication or request for information/attendance received from the CMA.  Our specialist Competition Team and Reals Estate Team would be happy to advise on any communication that you may have from the CMA and to guide you through your dealings with the CMA.

The CMA expect to publish an update on the market study, and to confirm whether or not they propose to make a market investigation reference, in summer 2023.

The CMA must publish their final report by 27 February 2024.

This article was authored by Fieldfisher real estate partner Merle Wray, competition partner Nick Pimlott and paralegal Natalie Darwis.