14 September 2023

What Next For The CMA's Housebuilding Market Study?

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The Competition and Markets Authority (the "CMA") has powers under the Enterprise Act 2002 to conduct inquiries into the workings of a market. The framework is a two-stage one: a preliminary market study...
UK Real Estate and Construction
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The Competition and Markets Authority (the "CMA") has powers under the Enterprise Act 2002 to conduct inquiries into the workings of a market. The framework is a two-stage one: a preliminary market study (lasting for 12 months), followed by an in-depth market investigation in cases where the CMA considers there to be reasonable grounds to suspect that a feature (or combination of features) of a market in the UK prevents, restricts or distorts competition.

In February 2023, the CMA launched a market study into the housebuilding sector in England, Scotland and Wales. Following its initial work, the CMA has now (on 25 August 2023) published an update report and consultation on its proposal to refer the sector for a full market investigation. The consultation will run until 18 September 2023.

In this briefing we discuss what this proposal means in practice, including by outlining the nature of a market study/market investigation exercise by the CMA, summarising the key elements of the latest report and likely next steps, and considering how this exercise may impact on the UK's housebuilding sectors.

The supply of new-build housing in England is currently short of the Government's original goal of 300,000 per annum, and this shortfall is felt most acutely in London, the East and the South East. The CMA is seeking to understand whether the functioning of the housebuilding sector has a negative impact on the overall number of new houses supplied, including the number of these that are affordable, as well as the level of choice that consumers can make among new houses. Whilst the CMA does not propose to test the validity of supply targets, or whether enough homes are being built to meet demand, it intends to give a view on the factors that are impacting the (under) supply against targets, and its views on the relative importance of these factors.

1. What are market studies and market investigations?

Market studies are one of the tools that the CMA can use to examine possible competition or consumer protection issues and seek to solve them. It involves the CMA considering whether a market, or elements within it, are working well. If it is not, the CMA can look at different ways to address the problems, such as:

a) making recommendations to the Government to change regulations or public policy;

b) encouraging businesses in the market to self-regulate;

c) taking consumer or competition law enforcement action against companies (however, this would involve opening a new, and separate, investigation under those relevant powers); or

d) making a reference for a more in-depth (phase 2) market investigation, which would enable the CMA to impose remedies on firms where appropriate for addressing the issues identified (something that is not open to the CMA during a market study).

A market study begins with the publication of a 'market study notice' by the CMA, setting out the scope of the work that it intends to carry out. The CMA must then publish its findings in a 'market study report', including any actions that it has decided to take, within 12 months of publication of the market study notice. However, where the CMA proposes to make a market investigation reference, it must consult on that proposed decision within 6 months of the 'market study notice'.

In the case of the housebuilding sector, the CMA launched its market study on 28 February 2023. It is now consulting upon its proposal to refer the sector for an in-depth market investigation.

The powers that the CMA has under a market study and a market investigation are quite different. It is only if and when a market is referred for an in-depth market investigation that the CMA (represented by an inquiry panel) can then, where appropriate (i.e. where is finds an adverse effect on competition), impose orders on, or accept commitments from, market players. These might, for example, require structural remedies (such as divestments of businesses), behavioural remedies (such as promises to price in a certain way) and/or other measures (such as requirements to improve consumers' access to information etc). As with a market study, a market investigation can also result in recommendations to others (such as the Government, a regulator or a local authority) to take remedial action, although the CMA cannot require that this is done.

2. Which issues does the market study investigate?

What does the term "housebuilding" mean in the context of the CMA's study?

For the purposes of the market study, 'housebuilding' encompasses all aspects of the construction and sale of new houses, flats, and any other accommodation, including:

  • buying land for future development (both greenfield and brownfield land);
  • obtaining planning permission and putting planning agreements in place;
  • placing post-purchase charges or restrictions on freeholders when this occurs.

It excludes conversions or changes of use of existing buildings, and the repair, renovation, and remodelling of existing housing stock, which is interesting because office-to-residential conversions and rooftop extensions have provided a good source of additional housing in recent years. In relation to the imposition of post-purchase charges or restrictions on freeholders, it excludes charges or restrictions in respect of private gated residential estates, but otherwise includes the process of providing ongoing services or approvals in respect of such post-purchase charges or restrictions.

The report does not consider any of the residential property sub-sectors such as BTR, student housing, retirement housing or housing-with-care.

The CMA's market study seeks to understand how the market is structured, the relationships between key participants, and other aspects of the way the industry operates, at each key stage of the housebuilding process. Their goal is to explore whether there are distortions in the housebuilding sector that are harming consumers, for example: because prices are higher, profits are higher, or quality/innovation is lower than if the market worked well. In doing so, the CMA focusses on 4 areas:

  1. Housing supply and quality: are builders delivering the right sorts of homes that communities and buyers need, in the right volume (including affordable housing)? How fair are the estate management fees charged for 'unadopted' roads and other estate amenities?
  2. Land banking: is the practice of 'banking' land before or after receiving planning permission anti-competitive?
  3. Planning: what are the problems with the process of councils overseeing the delivery of homes and the negotiation of affordable home requirements?
  4. Innovation: what factors hold builders back from adopting new building techniques or moving towards more sustainable, net zero homes?

3. What are the CMA's preliminary findings?

The CMA's update report sets out its preliminary view that there are two main areas of concern in the UK's housebuilding sector in the competition law context. These are the areas which the CMA considers are likely to require a market investigation:

1 Land banking: The CMA is examining whether land ownership at the local market level is concentrated among a small number of market players, both in terms of ownership of developable land, as well as in terms of the holding of permissions to build – and what implications this has for competition to supply new homes in local markets. However, based on the views on some stakeholders, the CMA is concerned that the amount of 'strategic' land held by the largest housebuilders could be restricting the availability of developable land, and/or the transparency of ownership or control of land in a given area, and therefore acting as a barrier to entry for small and medium sized housebuilders. Other concerns include whether the control of a large proportion of developable land by a small number of housebuilders negatively impacts on buyers of new homes by, for instance, reducing the quality or range of new homes, and/or slowing down completion rates. The CMA acknowledges that large land banks could be a symptom of other problems with the housebuilding market, such as the slowness and unpredictability of the planning process. It also acknowledges the views of many housebuilders that land banks help to ensure a steady stream of projects successfully passing through the planning system.

2 Estate management: The CMA is concerned about problems in the way in which common amenities in new-build housing estates (such as roads, lighting and public open spaces) are managed by estate management companies.

The key issues include a lack of transparency for consumers about the way in which a newly built estate will be managed, including the actual costs/charges involved; the significant market power conferred on estate management companies by housebuilders because of the small number of such companies, the high barriers for consumers to switch estate management companies, combined with the reluctance of local authorities to adopt such common areas; and the inadequate rights and protections for freeholders facing unsatisfactory freehold management arrangements (for example they have no legal right to manage, there is no ombudsman, and they risk potential exposure to disproportionate sanctions under the Law of Property Act 1925). The Government has already recognised the problems in this area - in June 2019 the Government's response to its 2018 consultation on leasehold reform confirmed that it would legislate to give freeholders equivalent rights to leaseholders to challenge the reasonableness of estate rent charges (replicating relevant provisions in the Landlord and Tenant Act 1985) as well as a right to apply to the First-tier Tribunal to appoint a new manager to manage the provision of services covered by estate rent charges (replicating the relevant provisions of the Landlord and Tenant Act 1987). They also said they would consider introducing a Right to Manage for residential freeholders. These proposals have not yet been brought forward, but would have the potential to meet the CMA's objectives if implemented.

4. Other concerns under investigation?

The CMA is also continuing to investigate concerns that:

  1. the planning systems in England, Scotland and Wales are impeding the effective functioning of the housebuilding market;
  2. access to land and access to finance are key barriers to smaller housebuilders being able to compete effectively; and
  3. large housebuilders have a strong market position in the housing sector, and that this gives them power both in housing delivery and maintaining higher prices than in a competitive market.

5. What does the CMA's proposal to make a reference mean in practice?

The CMA considers that the legal test for a reference to a full market investigation is met (in relation to land banking and estate management). However, at several places in its report, the CMA refers to the possibility of the problems identified being appropriate addressed by reforms to the planning system and legislative/policy reform. These outcomes would not require a market investigation reference as recommendations to government fall within the scope of the CMA's powers at the end of a market study ( see above). However, whilst the CMA further considers its views on the appropriate action, it has in effect been required to launch the consultation due to a recent ruling of the UK Competition Appeal Tribunal.

The Competition Appeal Tribunal (in Apple v CMA (1576/6/12/23), currently under appeal by the CMA) found that, where the CMA decides 6 months into a market study not to make a market investigation reference in respect of a particular aspect, it cannot, in light of subsequent evidence or developments that may come to light in the second half of the market study, revisit that decision. This judgment has inevitably led, therefore, to the CMA taking a more over-inclusive approach to the aspects covered by any proposal to make a market investigation reference.

6. Next steps for the CMA

The CMA does not have to make a final decision on whether to make a market investigation reference until the conclusion of the market study (in February 2024), by which time it will have gathered and analysed further evidence and considered the results of the consultation. The proposal to refer may not, therefore, ultimately be taken forward in relation to all (or indeed any) of the aspects covered – whether there will in fact be a market investigation (and, if so, what it will cover) will become clear at the end of the market study period.

What is the scope of the consultation?

The CMA welcomes feedback on the market investigation reference proposal set out in its interim reports, and on the following questions in particular:

  • Do you agree with the CMA's reasons for suspecting that there may be features of the land and housebuilding markets leading to competition issues in the supply of houses and estate management services?
  • Are there any reasons why a market investigation reference may not be the most appropriate outcome of the market study? Is this because of:
    • the suitability of the use of the CMA's order making powers, given the issues that may exist in these markets;
    • any alternative possible solutions, drawing out, if appropriate, long-term solutions and measures to mitigate the issues the CMA has identified in the short-term; and
    • any views on the likelihood of alternative solutions being implemented and what factors may increase their likely success.

The consultation closes at 5pm on 18 September 2023.

In relation to the further three concerns identified by the CMA ( see section 5 above), the CMA will continue to investigate:

  • Firstly, the extent to which the workings of the planning system impede the effective functioning of the housing market. The points of concern include its complexity, the uncertain outcome of any application, and the increasing length of time taken to grant planning permission. The CMA anticipates that these difficulties will have a greater impact on smaller housebuilders, because the increasing fixed costs of managing the planning process will represent a higher proportion of their revenues.
  • Secondly, the potential barriers to entry and expansion in the housing market, which they expect will disproportionately affect smaller housebuilders, including negotiating the planning system, getting access to land, and getting access to finance.
  • Thirdly, how competition works in the market, both in terms of competition to secure land for development and competition to supply housing to consumers, as well as the interplay between the two. As part of this, they will continue to investigate whether concentration in specific local areas may lead to adverse outcomes (such as slower delivery rates); why smaller housebuilders' market share is reducing; and what impact this decline has on market outcomes.

7. What does this mean for the UK's residential real estate sector?

The real estate sector has welcomed the CMA's provisional view that (1) the housebuilding market does not seem to be overly concentrated in the hands of a few developers, and (2) the complexity of the planning system gives larger developers an inherent advantage because they have the resources and the knowhow to successfully navigate it.

However, housebuilders should consider responding to the current consultation. In relation to land banks, the CMA suggests that divestment of landholdings may be a suitable remedy in concentrated markets, so it is important for the industry to engage with this process. The report does not make reference to existing legislative changes proposed in the Levelling Up and Regeneration Bill ("LURB"). For example Part 11, as it currently stands, will allow the Government to establish a register of contractual controls. This would go some way towards meeting the CMA's objections to land banking as it would enable smaller housebuilders to see what land is held in a specific area by other developers. Similarly, there may be the ability for local planning authorities to take into account the applicant's past track record of delivery when assessing planning applications, alongside requirements intended to bring forward developments in a "timely manner". Alongside legislative changes there are also policy levers that can be pulled, with changes to the National Planning Policy Framework in the offing. Against that background, it will be interesting to see how the proposed planning changes feed into and influence the conclusions of the CMA, given their trajectories may not be aligned.

In relation to estate management, and as explained above, the CMA suggests that making recommendations to Government or others could potentially be a more appropriate route than the CMA using its order-making powers. Developers, planners and estate managers should consider responding to the consultation to help formulate a solution to the problems in this system. The suggestions set out in the report include: tightening the legislative framework so that developers have to build estate roads and other amenities to a set standard and that local authorities have to adopt them upon completion; introducing a code of conduct in relation to the standards to be upheld by management companies; and introducing rules around the disclosure of information to consumers about the implications of buying a house in an estate in which estate amenities are run by an estate management company. The report discusses the funding constraints on local authorities as a factor contributing to their reluctance to adopt estate amenities, but it might be interesting to explore the extent to which section 106 contributions remains unspent in specific localities.

More generally, there is real danger in using a broad-brush approach when assessing the role of the planning system in housing delivery. It is overly simplistic to badge it as a key contributor to a perceived landbanking issue. The reality is that no two sites are ever the same, and distinctions should be drawn between small, medium and large sites and the way they interact with the planning process. Each will have site specific hurdles to overcome, such as viability challenges, funding issues and/or pre-existing development constraints.

Naturally, it is the largest sites which have the greatest potential to make a meaningful contribution to housing delivery. However, as might be expected, they also require the biggest time and resources commitment when navigating the planning system. Outline permission will often be the chosen route for these schemes, with details to be worked up during the subsequent Reserved Matters stage with further approvals required. As a result, these developments are often delivered over the course of several years and phases.

On the other hand, smaller sites are often better suited to obtaining detailed planning permission. This is meant to be a faster process, with a start on site being possible once pre-commencement conditions have been discharged. In practice, there is sometimes a need to tweak permissions to reflect proposed changes in a development, after the grant of permission. The existing approach, under S73 of the TCPA 1990, can present challenges. However, the LURB currently proposes a streamlining of the variation process, via a new S73B for applications which are "substantially the same" as the existing permission. If this makes it on to the statute books, it may make delivery quicker notwithstanding subsequent scheme tweaks.

Lastly, in relation to the approach of landowners/developers, it is worth reflecting on the conclusions of Lichfields' Tracking Progress report (September 2021). Their analysis did not find "any systemic failure in converting planning permissions to development by the industry; the planning and development process is complicated and with risk, the mismatch between planning permissions granted and housing output on a yearly basis is readily explained by the simple matter of the time it takes to progress development through the regulatory stages, the risks associated with small site delivery (and by smaller builders), the overall phasing of build-out on larger sites, and the role of the planning system (via new planning permissions) in facilitating changes to planned development schemes to reflect practical requirements." As the CMA will doubtless be aware, the subjects of landbanking and planning reform are neither new nor straightforward, and are closely intertwined with wider considerations which influence the housing crisis.

8. What about the operational real estate sectors?

The CMA focusses on housing built for sale to consumers. It does not directly discuss any of the other forms of new-build residential schemes, such as:

  • Shared ownership schemes, retirement accommodation, housing-with-care and IRCs: these are unlikely to be covered by any conclusions reached by the report, as they constitute separate sub-markets and do not directly compete with mainstream housing. However, it should be borne in mind that the CMA (and its predecessor, the Office of Fair Trading) has previously investigated issues relating to retirement housing and the elderly care sector (primarily on the basis of its consumer protection powers, as discussed in an earlier briefing); these and other areas of real estate activity could therefore face further CMA scrutiny in future (albeit probably not as part of the housebuilding inquiry). Indeed, the CMA released a separate report on the same date entitled "Rented Housing Sector: Consumer Research Project – the Update Report" which refers to the CMA's proposal to review event fee practices in the retirement sector with a view to "considering whether further undertakings or guidance are necessary". This is discussed in a separate briefing.
  • BTR and student accommodation: housing for rent is outside the scope of the report. The CMA's separate report, referred to above, concludes that more work is needed to review and revise the CMA's Guidance for Letting Agents and to investigate the nature and marketing of 'zero-deposit' schemes amongst other aspects of the rental market, which we discuss in our separate briefing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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