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Moneyweek;bengt Does The Basic Maths On Building Plots And Leverage

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http://www.moneyweek...se-prices-12102

If rates do get squeezed up and house prices get squeezed down, then expect to see some significant write-downs in the sector as land banks get reappraised. That could be devastating for house-building stocks.'

This is nothing new to many on here,but nicely explained methinks.wonder what guitarmans enemies on that share forum will make of it?

Posted numerous times on HPC - but a reminder for the noobies!

Barratt Developments made a loss of nearly £600m in the second half of last year after its residential and commercial land plummeted in value in an 'intensely difficult' market.

The struggling housebuilder, which owns commercial developer Wilson Bowden Developments, crashed to a loss of £592.4m, against a profit of £194.6m in the same period in 2007.

The loss came after Barratt wrote down the value of its land by £494.9mon top of the £208m writedown last June – which comprised £431.5m for housebuilding and £63.4m for commercial developments.

http://www.propertyweek.com/news/barratt%E2%80%99s-%C2%A3600m-loss-after-land-values-fall/3134901.article

Edited by erranta

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Well, if the finished house is worth £360,000 and it costs £200,000 to build, then you'd only want to pay £160,000 for the plot. That's still down £40,000 – but in percentage terms, it's a fall of not 10%, but 20%!

In this case, the plot has fallen by twice as much as house prices in general. You can see the dangerous effect of leverage at work.

So as prices turn down and the market values of plots fall, the house builders have to write down the value of their land bank. When you factor in the house builders' financial leverage on top of land leverage, house builders' profits can quickly turn to massive losses.

This is nothing new to many on here,but nicely explained methinks.wonder what guitarmans enemies on that share forum will make of it?

And it can be more brutal in percentages in the real world than MoneyWeek's text book example, as Laurejon once found out. Now the banks can't rely on government bailouts, nor markets full of credit to always dive into, it could be they are finally going to get nasty soon.

Nasty in the sense of objectively valuing things, not taking crazy risks on behalf of their shareholders, and actually properly seeking their money or selling off assets from defaulters who borrowed to pay top property boom prices.

I have bought several plots of land over the years for development.

I purchased an old shack with no permission on the south coast for 40K in 1989 and gained permission for a pair of semi-detached chalet bungalows.

15months later having completed that project and sold them on and made a tidy sum I purchased a very similar plot same size but with outline for 115,000 and used the same drawings for th detailed application that was passed immediately using the other sites permission as a precedence.

The recession hit, and the bank revalued the site I had paid 115,000 for at 25,000

During the recession, you could not give a plot of land away, it would cost more to build a house than the house was worth on the open market, and that did not include the land prices.

Therefore land was essentially worthless.

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There's something very amiss in his logic.

If the value of the land component falls faster than the selling price and what he claims to be the 'fixed' cost of development remains constant then the profit margin must rise, making it more, not less, profitable per unit when land prices fall.

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Posted that on the bdev forum:

http://www.iii.co.uk/investment/detail?code=cotn:BDEV.L

Some people there are seriously attached to their shares - still peddling the supply and demand argument!

Wonder if the Gothicform there is the same one on the skyscrapercity forum?

That place is seriously infested with liebour hacks who would just love for the govt to spunk a few trillion pounds on private skyscraper projects just so they can have a nice futuristic skyline (sitting empty and collecting dust) The guys probably a fund manager making sure our pensions evaporate into nothing. :lol:

People need to realise its not primarily supply and demand of houses and people. Its supply and demand of credit.

No cheap and easy credit, the speculative tranche of demand dissapears.

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There's something very amiss in his logic.

If the value of the land component falls faster than the selling price and what he claims to be the 'fixed' cost of development remains constant then the profit margin must rise, making it more, not less, profitable per unit when land prices fall.

Whilst you are clearly smart enough to have figured that out, I think you might be over-analysing. The example he uses is just illustrative of the principle, not a complete economic model of house building.

The targeted developer's margin (because they don't always achieve one, but a rational builder will always try) will be that sufficient to provide an appropriate return on the capital invested to complete the project.

So if land were to get cheaper, the required margin would fall in absolute terms, but not necessarily in percentage terms (as we still need a return on the physical materials and labour spend which remains constant in this scenario).

He's dead right that in a down cycle the landowner should take the biggest hit, but under economic theory landowners take all the increased economic productivity over time (ricardos law of rent) so in any economy that is moving forwards land can be a good long term investment.

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There's something very amiss in his logic.

If the value of the land component falls faster than the selling price and what he claims to be the 'fixed' cost of development remains constant then the profit margin must rise, making it more, not less, profitable per unit when land prices fall.

Perfectly normal for the margin to rise as the developer has more risk in a falling market.

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Wonder if the Gothicform there is the same one on the skyscrapercity forum?

That place is seriously infested with liebour hacks who would just love for the govt to spunk a few trillion pounds on private skyscraper projects just so they can have a nice futuristic skyline (sitting empty and collecting dust) The guys probably a fund manager making sure our pensions evaporate into nothing. :lol:

People need to realise its not primarily supply and demand of houses and people. Its supply and demand of credit.

No cheap and easy credit, the speculative tranche of demand dissapears.

Very interesting piece of news!! Do you have a link to a topic he's (rabidly) posted in? I'll have to search later.

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thanks for posting,jeez what a memory you have.Miss laurejon.He had some interesting views/experiences.

remember reading somewhere that (FT?) that land moves at 3x the rate of change in house prices,mnoneyweek says two??????

also remember reading in the FT that historically a 5% increse in demand for hosuing creates a 20% uplift.never seen a deeper analysis of these stats than that but would appreciate one of the more learned posters offering some.

It makes sense. The question is how sticky are prices on their way down, due to sellers resistance to accept the new reality.

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Whilst you are clearly smart enough to have figured that out, I think you might be over-analysing. The example he uses is just illustrative of the principle, not a complete economic model of house building.

The targeted developer's margin (because they don't always achieve one, but a rational builder will always try) will be that sufficient to provide an appropriate return on the capital invested to complete the project.

So if land were to get cheaper, the required margin would fall in absolute terms, but not necessarily in percentage terms (as we still need a return on the physical materials and labour spend which remains constant in this scenario).

He's dead right that in a down cycle the landowner should take the biggest hit, but under economic theory landowners take all the increased economic productivity over time (ricardos law of rent) so in any economy that is moving forwards land can be a good long term investment.

I was over analysing? :blink:

His basic premise is wrong the maths dictate that margins must rise per unit sale. Unless sale prices were to fall faster than land prices (which negates his argument entirely anyway)

He seems to be conflating land bank write downs on the b/s with margins.

That said I have no idea how the builders allocate written down land prices to each unit sold in the P&L account.

Builders shares have performed well since the November QE2 low. BDEV +70%; Persimmon + 50%.

BDEV

http://stockcharts.com/h-sc/ui?s=BDEV.L&p=D&yr=1&mn=0&dy=0&id=p22209026901

PSN

http://stockcharts.com/h-sc/ui?s=PSN.L&p=D&yr=1&mn=0&dy=0&id=p65379188136

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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