Summary
Whilst there is no doubt that there will be significant write downs on some sites in most house-builders’ land banks, the nature of the land deals for many of the sites in those land banks means that much of the pain will be felt by the original vendors of the sites rather than the house-builders themselves.
Analysis
Through 2006-2007 house-builders desperate to secure sites in an over-heated land market bid far too high for immediately-developable sites. Those bids depended on continued growth in sales prices and rapid sales rates.
New build house prices have fallen back from their peak last year, and more importantly sales volumes have collapsed by around 70% from this time last year. As a result, there is no doubt that all of the major house-builders will have sites on their books where the historic cost exceeds current Nett Realisable Value by a significant margin. I have heard comments that NRV of some sites could be as much as 50% down on values 12-18 months ago.
However, we must remember that the majority of most house-builders’ land banks are strategic i.e. long term, where purchase price is low to reflect the long lead time to assemble larger sites and secure planning permission; or are the subject of options where the up-front payment is modest and the purchase price is payable only when development commences; or has been bought on a conditional basis, often at a price as low as 10-15% of current MV, with an overage/claw-back arrangement under which the balance is payable only when development commences or even when the houses are sold.
In most of these circumstances, the risk in a falling or stalling market lies with the original vendors of the sites to the house-builders.
Finally, we must remember that there is a fundamental and long term shortage of housing in the UK, largely as a result of government policy to protect the countryside. Even last year, nett new housing completions were in the region of 170k, at a time when around 223k households formed. A short term hiatus in house building will only increase that shortfall, and build rates or prices must inevitably rise again.
