Can They Fix It? CMA Report Looks At Property Factoring Arrangements On Housing Estates
29th April 2024
An article from spice-spotlight.scot.
The UK Competition and Markets Authority (CMA) recently published the final report of its market study into housebuilding in England, Wales and Scotland.
The CMA's view is that "the housebuilding market is not delivering well for consumers" due to problems in the planning system and the speculative nature of development. It also finds that there is "significant consumer detriment" in the private management of amenities on housing estates such as roads, sewers and drains, public open spaces etc. (see the CMA's press release).
This blog looks at the CMA's analysis of the private management of amenities on housing estates and how its conclusions apply to Scotland.
Private management of amenities on housing estates
As outlined in the SPICe Briefing ‘Property Factors - Frequently Asked Questions', housing estates often have areas of land which are used by, or benefit, all the homeowners in the estate and sometimes the general public (e.g. play parks, green spaces or drainage systems).
In the past, these areas were normally owned and managed by local authorities as they would adopt the land (i.e. take on responsibility for it in perpetuity at public expense). However, for some time it's been very common for the private sector to be involved. According to the CMA, 80% of new homes sold by the eleven biggest builders in 2021 to 2022 are subject to estate management charges.
There are different ways in which private companies can get involved.
One approach involves what are known in Scotland as "land-owning maintenance companies" purchasing the common spaces from the housing developer and agreeing to act as the property manager (also known as "property factor") for the new estate when it is built. Residents are then required in their title deeds to pay these businesses for managing the common spaces. Unlike a contract, the requirement to pay passes on to future buyers.
Another approach, the most common one according to the CMA's evidence, is the setting up of a resident management company (RMC) - controlled by the residents - which owns and manages common spaces, often by using a property factor.
Advantages and disadvantages of private sector involvement
Private sector involvement can benefit housing developers financially as they do not need to pay local authorities the "commuted sum" (a capital payment representing forecasted future maintenance costs), which councils require for adopting the land. Local authorities also do not have to consider how to finance the management of land on housing estates long term.
The system has, however, been the subject of criticism for some time and there have been various inquiries into it over the years (for details see the SPICe Briefing ‘Property Factors - Frequently Asked Questions'). However, these haven't led to fundamental changes in policy.
For its part, the Scottish Government's approach to the issue has been to rely on rules regulating the sector in the Property Factors (Scotland) Act 2011 and the existing legislation on dismissing property factors. Since 2013 the Scottish Government has also proposed a voluntary code of practice on dismissing and replacing land-owning maintenance companies. However, no code has been published with the Scottish Government recently stating, in response to public petition PE2006, that the work has not progressed "due to other work pressures."
All in all though, the Scottish Government’s approach hasn’t challenged the underlying model of private sector involvement in the management of amenities on housing estates. The Scottish Government has also recently stressed, in response to public petition PE2006, that it has no plans to change the law in this area.
The CMA’s analysis
The CMA takes a very different view to the Scottish Government (and other governments across the UK). Based on its analysis of the evidence, the CMA’s view is that the status quo isn’t working for homeowners and that fundamental change needs to happen.
According to the CMA, problems include:
high estate management fees, a significant proportion of which may be allocated to management/administration, rather than maintenance work
lack of transparency about important details of management arrangements
amenities not being constructed to an acceptable quality or maintained satisfactorily over time
the fact that it is very difficult, or sometimes not possible, to switch management companies.
The CMA examines the drivers behind these problems and concludes in its report that a root cause is the:
"4.161 ... decrease in levels of adoption of amenities by relevant authorities, resulting in a proliferation of private management arrangements in which estate management companies may possess significant market power."
It also takes the view that consumer protections, e.g. in Scotland the Property Factors (Scotland) Act 2011, don’t go far enough.
The CMA’s report concludes that:
"3.92 ... as a result of the proliferation of this model, and with some households unable to switch provider at all, households may face detriment .... We consider that if the status quo is maintained, aggregate detriment is likely to worsen over time ..."
The CMA’s recommendations
One of the options for the CMA at the end of a market study is to proceed to an in-depth market investigation. The CMA has decided not to do this on the basis that government action is arguably a more appropriate response. As a result, the report recommends that the UK, Scottish and Welsh governments:
implement common adoptable standards for public amenities on new housing estates
implement mandatory adoption of public amenities on new housing estates
prohibit the establishment of new embedded management arrangements (i.e. what are known in Scotland as land-maintenance companies)
provide guidance to members and directors of RMCs to support them in managing the amenities on their housing estates.
It also recommends that the UK Government, in consultation with the devolved governments, introduces enhanced consumer protection measures in this area.
What next?
CMA recommendations aren’t binding on government. The report does, however, provide a serious challenge to the status quo in this area and it will be interesting to see how governments across the UK respond. Local authority funding is likely to be a key issue given the report’s recommendation that there should be mandatory adoption of public amenities on new housing estates. The report itself recognises this, noting concerns about lack of funding and stating that:
"5.37 ... the UK, Scottish, and Welsh governments will need to consider how best to ensure that appropriate funding is provided to local authorities."
26 February2024
CMA finds fundamental concerns in housebuilding market
The CMA has concluded its housebuilding market study in England, Scotland, and Wales.
Planning system and the limitations of speculative private development have seen too few homes built.
Concerns around estate management charges and the build quality of some new homes.
New Competition Act investigation opened into 8 housebuilders following evidence suggesting information sharing.
The Competition and Markets Authority (CMA) has published its final report on the housebuilding market in Great Britain - finding that the complex and unpredictable planning system, together with the limitations of speculative private development, is responsible for the persistent under delivery of new homes.
The study also found substantial concerns about estate management charges - with homeowners often facing high and unclear charges for the management of facilities such as roads, drainage, and green spaces. Concerns have been found, too, with the quality of some new housing after the number of owners reporting snagging issues increased over the last 10 years.
Sarah Cardell, Chief Executive of the CMA, said:
Housebuilding in Great Britain needs significant intervention so that enough good quality homes are delivered in the places that people need them.
Our report - which follows a year-long study - is recommending a streamlining of the planning system and increased consumer protections. If implemented, we would expect to see many more homes built each year, helping make homes more affordable. We would also expect to see fewer people paying estate management charges on new estates and the quality of new homes to increase. But even then, further action may be required to deliver the number of homes Great Britain needs in the places it needs them.
The CMA has also today opened a new investigation into the suspected sharing of commercially sensitive information by housebuilders which could be influencing the build-out of sites and the prices of new homes. While this issue is not one of the main drivers of the problems we’ve highlighted in our report, it is important we tackle anti-competitive behaviour if we find it.
Housebuilding in Great Britain
There are persistent shortfalls in the number of homes built across England, Scotland, and Wales, with less than 250,000 built last year across Great Britain - well below the 300,000-target for England alone.
The report identified a wide range of different types of housebuilders operating in the market: around two-fifths of the homes built between 2021 to 2022 were delivered by the largest, national housebuilders while more than 50,000 homes were delivered by thousands of smaller, regional builders.
Around 60% of all houses built in 2021 to 2022 were delivered by speculative private development, which is when builders obtain land, secure planning permission, and construct homes without knowing in advance who will buy them or for how much. This way of building homes has given builders flexibility to respond to changes in the market. However, the country’s reliance on this model has seen the gap widen considerably between what the market will deliver and what communities need.
CMA Findings
The report found that this speculative approach to building, coupled with complex and unpredictable planning rules across the three nations, has been responsible for the persistent under delivery of homes:
Planning Rules: the planning systems in England, Scotland and Wales are producing unpredictable results and often take a protracted amount of time for builders to navigate before construction can start. The report highlights that many planning departments are under resourced, some do not have up to date local plans, and don’t have clear targets or strong incentives to deliver the numbers of homes needed in their area. They are also required to consult with a wide range of statutory stakeholders – these groups often holding up projects by submitting holding responses or late feedback to consultations on proposed developments.
Speculative Private Development: the report found another significant reason behind under delivery of homes are the limitations of private speculative development. The evidence shows that private developers produce houses at a rate at which they can be sold without needing to reduce their prices, rather than diversifying the types and numbers of homes they build to meet the needs of different communities (for example providing more affordable housing).
Land Banks: the CMA assessed over a million plots of land held by housebuilders and found the practice of banking land was more a symptom of the issues identified with the complex planning system and speculative private development, rather than it being a primary reason for the shortage of new homes.
Private Estate Management: the CMA found a growing trend by developers to build estates with privately managed public amenities – with 80% of new homes sold by the eleven biggest builders in 2021 to 2022 subject to estate management charges. These charges are often high and unclear to homeowners. Whilst the average charge was £350 – one-off, unplanned charges for significant repair work can cost thousands of pounds and cause considerable stress to homeowners. The report highlights concerns that many homeowners are unable to switch estate management providers, receive inadequate information upfront, have to deal with shoddy work or unsatisfactory maintenance, and face unclear administration or management charges which can often make up 50% or more of the total bill.
Quality: housebuilders don’t have strong incentives to compete on quality and consumers have unclear routes of redress. Analysis also suggests that a growing number of homeowners are reporting a higher number of snagging issues (at least 16). The CMA’s consumer research and other evidence revealed that a substantial minority also experienced particularly serious problems with their new homes, such as collapsing staircases and ceilings.
Information Sharing
The CMA found evidence during the study which indicated some housebuilders may be sharing commercially sensitive information with their competitors, which could be influencing the build-out of sites and the prices of new homes. While the CMA does not consider such sharing of information to be one of the main factors in the persistent under-delivery of homes, the CMA is concerned that it may weaken competition in the market.
The CMA has therefore launched an investigation under the Competition Act 1998 into Barratt, Bellway, Berkeley, Bloor Homes, Persimmon, Redrow, Taylor Wimpey, and Vistry. The CMA has not reached any conclusions at this stage as to whether or not competition law has been infringed.
More information can be found via the CMA’s housebuilding investigation case page.
Next Steps
The CMA believes a substantial intervention in the housebuilding market is necessary to address the issues its market study has identified.
The CMA would like to see a housebuilding market that delivers:
more homes overall, and particularly in the areas of highest demand, in turn reducing pressure on affordability;
consistently better outcomes on new-build quality, with consumers having an effective route to redress; and
reduced detriment to consumers arising from the private management of public amenities on new-build estates.
The CMA is making recommendations to governments in those areas where it sees opportunities to improve market outcomes without significant trade-offs with other policy objectives. These include:
requiring councils to adopt amenities on all new housing estates.
introducing enhanced consumer protections for homeowners on existing privately managed estates – including making it easier for homeowners to switch to a more competitive management company.
establishing a New Homes Ombudsman as soon as possible and setting a single mandatory consumer code so homeowners can better pursue homebuilders over any quality issues they face.
Given the wider policy trade-offs and complexities that are inherent in the design and operation of the planning system, the CMA does not consider it appropriate to make specific recommendations to governments in this report about how those trade-offs should be made. However, given the vital role that the planning systems play in shaping market outcomes, the report sets out proposed options for consideration. These include:
ensuring local authorities put in place local plans and are guided by clear, consistent targets that reflect the need for new homes in their area.
streamlining the planning systems to significantly increase the ability of housebuilders to begin work on new projects sooner - while not watering down protections such as for the local environment. Measures to improve the capacity of council planning departments would also enable them to process more applications.
introducing measures to increase the build-out of housing sites by incentivising builders to diversify the tenures and types of homes delivered.
While the recommendations and options above will significantly improve outcomes for homeowners and the housebuilding market, the evidence shows that the market may still not deliver the quantity of homes that meets Great Britain’s housing need.
It is open to policymakers to deliver change through more fundamental interventions, often with fiscal and policy implications, that go beyond the way in which the market itself works but would have a significant impact on the quality and affordability of new homes being built. While it is not for the CMA to offer recommendations or specific policy proposals in this space now, the report sets out areas of potential intervention.
These interventions would include a significant increase in non-speculative house building that has previously been led by local councils and housing associations.
More information – including the full final report – can be found via the CMA’s housebuilding market study case page.
The final report marks the end of the CMA’s market study.
The housebuilding market study examined housebuilding in England, Scotland, and Wales. The CMA launched the market study on February 28 2023.
The CMA launched a consultation on 25 August 2023 on whether to make a Market Investigation Reference, based on concerns to do with weaknesses in the adoption process for roads and public open spaces resulting in responsibility for their maintenance being passed on to private companies that may have significant market power, and the large amount of developable land controlled by the largest housebuilders, which it was feared could be hindering the growth of smaller housebuilders. The CMA has decided not to launch a Market Investigation Reference at this time, for reasons set out in the final report.
The Chapter I prohibition of the Competition Act 1998 prohibits agreements, concerted practices, and decisions by associations of undertakings which have as their object or effect the prevention, restriction, or distortion of competition within the UK or a part of it and which may affect trade within the UK or a part of it unless they are excluded or exempt. The CMA may launch an investigation under the Competition Act 1998 if it has reasonable grounds to suspect that there has been an infringement of competition law.
There is no legal deadline to complete inquiries under the Competition Act 1998. As with all its work, the CMA will progress this investigation at pace whilst ensuring a robust and detailed review is conducted and parties’ rights of defence are respected.
The CMA launched its consumer protection project in the private rented sector in 2023. As previously announced, the current focus is on investigating so-called ‘event charges’ in the retirement housing sector with other work paused until the government implements its Renters Reform Bill and the Digital Markets, Competition and Consumers (DMCC) Bill which are currently going through Parliament.
