Wednesday, June 4, 2008

Bye Bye Barratt..?

Market data

I've been watching this share price for some time - now down 87% in a year and a whopping 10% fall this morning. These mega home builders are sitting on vast land banks - if one goes down, the market will be flooded with development land..

Posted by uncle tom @ 09:30 AM (1717 views)
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18 thoughts on “Bye Bye Barratt..?

  • This sector is now being hit hard – several of the larger builders are based in the North of England where a huge round of redundancies is now underway.

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  • little professor says:

    Ouch! That’s got to hurt:

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  • mark wadsworth says:

    A simple view is that a homebuilder is worth what his land bank is worth.

    1. These are nowhere near as vast as people believe, but still significant.

    2. Land prices fall disproportionately when house prices fall. Let’s assume at the peak of the market, the average home costs £200,000, of which £100,000 is construction costs, ergo, land value £100,000. But if house-prices fall by 40% (in extremis) to £120,000, the land value falls by 80% to £20,000.

    3. Chuck in a bit of gearing (assuming borrowing to land value was 50% at the peak) the builder ends up with plots of land worth £20,000 with borrowings of £50,000 on each one.

    4. They are doomed.

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  • Mark,

    The killer detail is when the developers also have large amounts of debt as a result of mergers – Barratt bought Wilson Bowden at the top of the market, and the merger that gave birth to Taylor Wimpey was also ill-timed.

    Taking your example, if a house sold last year for £200k, the maths is more like – build cost £40k, bloated admin £20k, land value £100k, profit £40k.

    The trouble is that in anticipation of further house price hikes they have been paying over the odds for land, and when negotiating mergers, the assumption has been made that 20% profit on turnover would continue, thereby grossly overvaluing the aquisition.

    Try checking the cost of building materials and labour – you can build a very big house for £100k if the land is free!

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  • Land price well explained, Mark – IMO. But only half the problem.

    Who will buy the land if a company goes into liquidation? The plots are invariably too big to be affordable to the individual looking to build themselves a nice house. So maybe all we will see is the bigger companies buying up the land of the smaller companies at ‘knockdown’ prices and sitting on it till the upturn.

    What would be nice is if a company bought the land, cheap – put in the infrastructure, and then sold it off as individual plots. Now there’s an idea…

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  • Mark @ 3

    Not sure it works like that. You are assuming building costs remain constant, which they don’t. When there is a boom, the brick manufacturer wants a piece of the action, so the price goes up (old supply and demand principle). You have also not factored in developers profit and fees (unless you include these in your building costs), but this is not a constant either.

    You are right in principle, but I think your figures are exaggerated and, it is a gross oversimplification to state that a homebuilder’s worth is only equal to his land bank value.

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  • “Who will buy the land if a company goes into liquidation? ”

    All the big companies are in trouble now, with little spare cash to buy land. Not all the plots are too big for one person, and a liquidator disposing of a part built development might well sell it off plot by plot.

    I have my eyes on a plot owned by Barratt (an old council maintenance yard) where building was due to commence this spring, but has now been put on ice. There’s permission for fourteen homes, and I can see profit from buying the whole site and then flogging the plots individually.

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  • Cornishman
    I’d love to build my own house (ok have it built for me with some design input from me).

    To buy a house from a retired downsizer that needs gutting seems to me to be a waste of money. I’d rather build a new house and have it how I want it – layout etc. and as has been said above build costs are quite cheap.

    (Build Store in Swindon are worth checking out if any of you are interested – its a supoermarket for self builders, they even have a complete house inside their warehouse and various cut aways of roofs and drainage systems so you can see how it all works, in fact quite interesting even if you don’t want to build your own house).

    Anyway funding is available for building plots and if enough people got together perhaps a private group could pick up a small land bank.

    If the plots were 20k each it would be worth buying 2 or 3 next to one another and just build one house and have a sensible sized garden until your kids need a house and then you could re-apply for the planning permission to build your children houses in 20 years time or so. Just a thought.

    Anyone interested ?

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  • I’m up for that Uncle Tom, if you fancy sharing it, where abouts is it ?

    Is there any sort of list showing developers land banks available to the public – I feel there must be somewhere – any of you clever chaps know where to find it ?

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  • last_days_of_disco says:

    @uncle tom

    Yipee, I know, for 100K you can build a “kick ass” house. This is my big plan. Buy a nice piece of land complete with planning permission at a fire sale and build the house of my wife’s dreams on it. The key is to keep my job through the bust. That will be difficult, but not impossible. In the great depression, 70% of people in the US were employed, I think that was the figure I read anyhow. Its all about making sure you don’t choke on your existing debt (i.e. don’t have any).

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  • str 2007

    you’ve got me thinking now. I remember in the early 80s that Dartington sold a big plot of land to a bunch of local self-builders so that they could all have an individual plot. The ‘group’ organised the roads and services and each person built their own house.

    The key is to be organised into a group. We know that the demand is there if the price is right. The land will be becoming available soon by all accounts. Someone in each locality would need to set up and organise a group. Maybe a self builders’ grouping website. Thinking aloud as I go along…

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  • mark wadsworth says:

    Hang about. There is no harm in builders making a reasonable margin/profit on the actual homebuilding (as opposed to land speculation). My favourite resource for looking up rebuild costs is the ABI calculator, which tells you worst case what the cost would be (plus handsome margin of error to enable the insurer to overcharge you).

    As pointed out above, the rebuild cost (including builder’s profit, architect’s profit) and so on for a kick-ass 4-bed house is about £200,000. If you are tough enough to self-build, of course it will cost you less than half that for materials alone.

    p.doff, of course my example above is oversimplified. It was an example!

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  • Mark,

    The ABI have a VI in you over-insuring your house, so they load every conceivable expense into their calculator – it’s not a good indicator of true home build costs.

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  • str 2007,

    For reasons that I hope would be obvious, I can’t tell you exactly where this is until I’ve bought it, other than to say it’s less than 50 miles from central London.

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  • Mark and Uncle Tom.

    The rebuild cost tables are just that i.e. REbuild. The figures include the cost of demolition of the remains of your burnt out ruin, plus site clearance etc. You would not use these figures to work out the cost of building a new house, which would be substantially less. Other factors obviously come into play such as site conditions – slope, ground quality, access etc so for a more accurate picture, each case on it’s merits.

    That said, I’ve always thought that the stated rebuild costs were high – and you may be right about the insurance rip-off. I mean, how often is a house completely destroyed anyway. But the ‘average clause’ may apply and if the loss adjuster calculates you are under-insured then the insurance payout is reduced by the same percentage. i.e. rebuild cost say £200k but you have insured for £100K then if cost of repairs after your chip pan fire is £500 than the insurance company gives you £250, less your excess, of course.
    Best therefore to be over, rather than under insured.

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  • A small thought for those pondering a self-build:

    If you look at the cost of building a detached house, and then consider the cost of building a house that has exactly the same number of rooms and facilities, but twice the floor area, you find the build cost only rises by about 40-45%.

    Conversely, the savings achieved by squeezing yourself into a rabbit hutch are pathetic!

    The only trouble is that having given yourself a handsome farmhouse kitchen, your nearest and dearest is bound to demand a bountiful supply of fixtures that you could otherwise have lived without, not least a hideously expensive AGA..

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  • cornishman says:

    AGAs are like varnished wooden boats. Beautiful things, which you admire when other people own them, but which you should avoid for yourself.

    IMO.

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  • mark wadsworth says:

    P. Doff and Uncle Tom, yes of course the ABI figures are vastly overinflated, I said that, but at least we have an idea of the upper limit, maybe the new build cost is ABI figure minus 25%, minus 50%, I don’t know.

    Agreed on AGAs, by the way. You have to get the architect to explain to her indoors that they’re not permitted under local smoke-free zone by laws or something.

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