Summary
Taylor Wimpey's results (5 August) show a further write down of £527m on their land bank and work in progress. The following day, Bellway launched a £45m rights issue to finance further land purchases (http://www.building.co.uk/story.asp?storycode=3146488&origin=bldgdailynewsletter). These different responses to the problem of writing down the value of sites purchased at the height of the housing land bubble in 2006/7 could have significant consequences as the market recovers.
Analysis
Land is held on house builders' balance sheets at the lesser of historic cost and nett realisable value. Since the top of the housing land boom in 2006/7, UK residential values have fallen by around 50%, and volumes by far more. The residential land market is virtually dormant at present.
Most house builders have far more land than they can develop in the foreseeable future. However, if they develop sites that were bought at the top of the market, then they have to crystallise the loss of value. On the other hand, if they can hold that land for several years until values recover, then they may be able to avoid such write-downs.
Taylor Wimpey are looking to start new sites, but their cash position means that new developments have to be on their historic, overvalued sites. On the other hand, Bellway's borrowings are more modest. Therefore they appear to have chosen to go into the very depressed residential land market to buy new sites very cheaply - possibly from their more highly geared competitors - to sustain development in the next few years. That means that they can mothball those overvalued sites until values recover to 2007 levels.
Unlike many other countries, there is still a shortage of housing in the UK. The need for more housing remains, but there is little or no demand amongst first time buyers because of their inability to obtain mortgage finance on realistic terms or to find the 20-30% deposits now required by lenders. However, pressure is building up, and once lending resumes on terms that are affordable, demand - and thus volumes and prices - is likely to take off rapidly. Those house builders that are in a position to go back into the land market in the short term are likely to derive considerable competitive advantage once that happens.
Jon Watson, MA DipArch DipTRP MRTPI consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
