The drying up of land sales and the collapse in rates of building have created a new monster that stalks the housebuilding sector: zombie landbanks.
A complex array of factors has led housebuilders and other landowners to sit on plots of land that they do not wish to sell and yet cannot afford to develop while house prices are at current depressed levels.
In spite of recent signs of life returning to the housing market, the dead weight of this volume of land raises questions about how quickly the sector can return to profit.
The secretive nature of land sales means that there are few reliable statistics for the level of activity in the market. But most observers agree conditions are unusually subdued.ADVERTISEMENT
вЂњThe market is not quite open yet. There is a lack of pressure on sellers to recognise that prices are falling,вЂќ says David Ritchie, chief executive of Bovis Homes.
Double whammy for housing - Jun-21Taylor Wimpey sees signs of recovery - Jun-19In depth: UK housebuilders - Jul-02Bellway sees effect of regional divergence - Jun-06Telford shares rise amid modest profit fall - May-28Redrow shifts focus to family homes - May-12Rob Perrins, finance director of Berkeley, which is due to report preliminary results on Friday, says: вЂњWe havenвЂ™t seen good value to date.вЂќ
Both companies have gone public with their plans to buy land aggressively in the downturn, and they are now being joined by start-ups such as Landbank, a vulture land buyer that plans to list on Aim next month.
The strategy was the making of Berkeley in the 1990s, when pressure from banks forced landowners to sell vast amounts of land at knockdown prices, which delivered handsome margins when they were finally built out.
But the planned spree has so far felt more like a phoney war. вЂњEven if you have deep pockets, thereвЂ™s just not a lot of land around,вЂќ says John Stewart, head of economic affairs at the Home Builders Federation.
вЂњUnless you absolutely have to, you do not want to sell at the bottom of the market.вЂќ
Chris Temple, a construction partner at PwC, the professional services firm, says: вЂњThe land that there is on the marketplace is lower quality. The builders do not want to sell their crown jewels.вЂќ
Savills estimates that urban land prices have fallen by 50 per cent, while the more bullish buyers believe that discounts of 70-85 per cent on peak prices should be available. However, most landowners appear to be holding out for a rebound in prices.
вЂњIf no one is sitting on your back saying вЂyou must sellвЂ™, you hold off, just in case prices come back,вЂќ says Mr Ritchie.
Analysts and executives worry that we may be witnessing the creation of вЂњzombie landbanksвЂќ вЂ“ stockpiles of overvalued land that sit on balance sheets but that cannot be turned into profitable developments until house prices recover.
The size of landbanks has risen in recent years. Although the absolute number of plots held by the UKвЂ™s listed volume housebuilders shrank last year from about 306,000 to 267,000, the number of houses they are selling also shrank, from 65,000 to 50,000 homes. That means the overhang of undeveloped sites has risen from 56 to 64 monthsвЂ™ supply.
Housebuilders could build at last yearвЂ™s rates until April 2014 without buying a single new plot of land; Bovis could hold out until May 2016.
Like the zombie banks blamed for stifling the recovery of JapanвЂ™s economy during the 1990s, many landbanks would be unsustainable were it not for the lenient treatment of their ownersвЂ™ debts.
вЂњThe banks have got the housebuilders on life support,вЂќ says one property market analyst. вЂњThey donвЂ™t think that the housebuilders have marked down their land enough, but they may not be viable companies if theyвЂ™re forced to sell it off at market rates.вЂќ
A refrain during Taylor WimpeyвЂ™s recent nine-month refinancing discussions was that its banks did not want to wind it up as they feared there would be slim pickings from its assets if they were sold into a slumping market.
The chain of leniency stretches to the banks themselves, which have parked many of their loans to landowners in the governmentвЂ™s asset protection scheme. Loans that would otherwise be called in are being supported because the government has promised to swallow all but the first 10 per cent of losses.
To get the market going again there needs to be either a fall in the value of land on housebuildersвЂ™ books or a rise in house prices, says John Messenger, an analyst at RBS.
вЂњIn the last recession most housebuilders kitchen-sinked their land values to start producing margins again,вЂќ he says.
But in spite of writedowns of 20-45 per cent by housebuilders, returning land to its true value may be harder this time.
Many housebuilders would like to write their land down more aggressively but international accounting standards now insist that they can only do so to the point where they are not making a gross loss on the sale. Administrative costs, interest payments and tax must then be subtracted, all but guaranteeing that there will be no earnings for shareholders until the overpriced land has worked its way through the system, says Mr Messenger.
вЂњThe industry is locked into making operating losses until they can find a way to make more savage writedowns or prices rebound.вЂќ
Shareholders may be in for a long wait. After the last recession, land prices did not return to 1989 levels for 10 years.