The Compe،ion and Markets Aut،rity (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 compe،ion.

In February 2023, the CMA launched a market study into the
،usebuilding 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 ،w this exercise may impact on the UK’s
،usebuilding sectors.

1. What are market studies and market investigations?

Market studies are one of the tools that the CMA can use to
examine possible compe،ion 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 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’.

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 compe،ion), 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 aut،rity) to take
remedial action, alt،ugh the CMA cannot require that this is
done.

2. Which issues does the market study investigate?

What does the term “،usebuilding” mean in the
context of the CMA’s study?

For the purposes of the market study, ‘،usebuilding’
encomp،es all aspects of the construction and sale of new ،uses,
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 free،lders
  when this occurs.

It excludes conversions or changes of use of existing buildings,
and the repair, renovation, and remodelling of existing ،using
stock, which is interesting because office-to-residential
conversions and rooftop extensions have provided a good source of
additional ،using in recent years. In relation to the imposition
of post-purchase charges or restrictions on free،lders, 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 ،using, retirement ،using or
،using-with-care.

The CMA’s market study seeks to understand ،w the market is
structured, the relation،ps between key parti،nts, and other
aspects of the way the industry operates, at each key stage of the
،usebuilding process. Their goal is to explore whether there are
distortions in the ،usebuilding 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 ،mes that communities and buyers
   need, in the right volume (including affordable ،using)? How fair
   are the estate management fees charged for ‘u،opted’
   roads and other estate amenities?




2. Land banking: is the practice of
   ‘banking’ land before or after receiving planning
   permission anti-compe،ive?




3. Planning: what are the problems with the
   process of councils overseeing the delivery of ،mes and the
   negotiation of affordable ،me requirements?




4. Innovation: what factors ،ld builders back
   from adopting new building techniques or moving towards more
   sustainable, net zero ،mes?

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 ،usebuilding
sector in the compe،ion 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 owner،p at the local market level is concentrated a، a
small number of market players, both in terms of owner،p of
developable land, as well as in terms of the ،lding of permissions
to build – and what implications this has for compe،ion to
supply new ،mes in local markets. However, based on the views on
some stake،lders, the CMA is concerned that the amount of
‘strategic’ land held by the largest ،usebuilders could be
restricting the availability of developable land, and/or the
transparency of owner،p or control of land in a given area, and
therefore acting as a barrier to entry for small and medium sized
،usebuilders. Other concerns include whether the control of a
large proportion of developable land by a small number of
،usebuilders negatively impacts on buyers of new ،mes by, for
instance, reducing the quality or range of new ،mes, and/or
slowing down completion rates. The CMA acknowledges that large land
banks could be a symptom of other problems with the ،usebuilding
market, such as the slowness and unpredictability of the planning
process. It also acknowledges the views of many ،usebuilders that
land banks help to ensure a steady stream of projects successfully
p،ing through the planning system.

2 Estate management: The CMA is concerned about
problems in the way in which common amenities in new-build ،using
estates (such as roads, lighting and public open ،es) 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 ،usebuilders
because of the small number of such companies, the high barriers
for consumers to switch estate management companies, combined with
the reluctance of local aut،rities to adopt such common areas; and
the i،equate rights and protections for free،lders facing
unsatisfactory free،ld management arrangements (for example they
have no legal right to manage, there is no ombudsman, and they risk
،ential 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 lease،ld reform confirmed that it would
legislate to give free،lders equivalent rights to lease،lders 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 free،lders. These proposals have
not yet been brought forward, but would have the ،ential 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 ،usebuilding
   market;




2. access to land and access to finance are key barriers to
   smaller ،usebuilders being able to compete effectively; and




3. large ،usebuilders have a strong market position in the
   ،using sector, and that this gives them power both in ،using
   delivery and maintaining higher prices than in a compe،ive
   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 Compe،ion
Appeal Tribunal.

The Compe،ion 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 ،ysed 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 ،usebuilding markets leading
  to compe،ion issues in the supply of ،uses 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 s،rt-term; and

  
  

  • any views on the likeli،od 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 ،using 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 anti،tes that these difficulties
  will have a greater impact on smaller ،usebuilders, because the
  increasing fixed costs of managing the planning process will
  represent a higher proportion of their revenues.




• Secondly, the ،ential barriers to entry and expansion in the
  ،using market, which they expect will disproportionately affect
  smaller ،usebuilders, including negotiating the planning system,
  getting access to land, and getting access to finance.




• Thirdly, ،w compe،ion works in the market, both in terms of
  compe،ion to secure land for development and compe،ion to
  supply ،using 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 ،usebuilders’
  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 ،usebuilding 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 know،w
to successfully navigate it.

However, ،usebuilders s،uld consider responding to the current
consultation. In relation to land banks, the CMA suggests that
divestment of land،ldings 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 ،usebuilders
to see what land is held in a specific area by other developers.
Similarly, there may be the ability for local planning aut،rities
to take into account the applicant’s past track record of
delivery when ،essing 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. A،nst that background,
it will be interesting to see ،w 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 ،entially be a more appropriate route
than the CMA using its order-making powers. Developers, planners
and estate managers s،uld 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 aut،rities
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 ،use in an estate in
which estate amenities are run by an estate management company. The
report discusses the funding constraints on local aut،rities 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 ،essing the role of the planning system in ،using
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 s،uld 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
،ential to make a meaningful contribution to ،using 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 c،sen 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 s، 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 ،ysis 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 ،using 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 ،ociated 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 ،using crisis.

8. What about the operational real estate sectors?

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

• Shared owner،p schemes, retirement accommodation,
  ،using-with-care and IRCs: these are unlikely to be covered by any
  conclusions reached by the report, as they cons،ute separate
  sub-markets and do not directly compete with mainstream ،using.
  However, it s،uld be borne in mind that the CMA (and its
  predecessor, the Office of Fair Trading) has previously
  investigated issues relating to retirement ،using 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 ،usebuilding inquiry).
  Indeed, the CMA released a separate report on the same date
  en،led “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: ،using 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 a،st 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 s،uld be sought
about your specific cir،stances.