Land Prices

[WickedLester]

I wasn't sure of the best board to post this on so I thought I'd try this one.

I recently bought a very few Inland PLC ZDP's after the wheels comprehensively fell off at the parent company Inland PLC. It's a high risk, high reward punt.

Inland PLC themselves buy land and then try to obtain planning permission on it before selling it on and in more recent years have built on it themselves.

They have a fairly substantial land bank in various stages of the planning process.

At the moment the parent company has more than sufficient net assets to redeem the ZDP's in full next year.

The question I would like to know the answer to is this. Are land prices the most elastic cost in the housebuilding triangle? What I mean is, if property prices are falling due to the cost of living squeeze and rising mortgage rates and build costs are rising due to wage and materials inflation, is paying substantially less for consented land the only way a housebuilder can continue in operation and still make a profit?

I ask because I am concerned that the NAV of Inland may disappear and I may not get my money back in that eventuality.

[Charlottesquare]

I wasn't sure of the best board to post this on so I thought I'd try this one.

I recently bought a very few Inland PLC ZDP's after the wheels comprehensively fell off at the parent company Inland PLC. It's a high risk, high reward punt.

Inland PLC themselves buy land and then try to obtain planning permission on it before selling it on and in more recent years have built on it themselves.

They have a fairly substantial land bank in various stages of the planning process.

At the moment the parent company has more than sufficient net assets to redeem the ZDP's in full next year.

The question I would like to know the answer to is this. Are land prices the most elastic cost in the housebuilding triangle? What I mean is, if property prices are falling due to the cost of living squeeze and rising mortgage rates and build costs are rising due to wage and materials inflation, is paying substantially less for consented land the only way a housebuilder can continue in operation and still make a profit?

I ask because I am concerned that the NAV of Inland may disappear and I may not get my money back in that eventuality.

Pretty much, but holders of land suitable for development take note of trends and supply reduces, they often have an in built figure in their heads and stubbornly will not shift downwards (non stressed house sellers are the same, they wait for better conditions).

A few over leveraged forced sellers (banks become impatient) will come a cropper and carry some supply to the market but generally land prices do have a price line underpinning them re supply and demand.

The key is not to invest much in heavily leveraged holders with lots of fixed costs to cover.

[Hariseldon58]

The other part of the equation for property developers is the cost and availability of credit to develop and build the site.

In early 2008 I had ‘sold’ our home and we were in the midst of our purchase of a property that was almost finished, in a small development of around 20 properties in a nice location in a popular cornish town.

The unusual feature was that the development had started 4 years previously… demolition and clearance of the site, building an underground car park, the external completion of about 75% of the houses, then the developer went bust…

The new team had finished to a high standard around 40% of the site and we arranged to visit the site just before we went off to the far east for 3 weeks…

Came back and found no queries whatsoever by our buyer, odd, solicitors were happy that the chain was intact but I insisted they proactively check and in fact the buyer had pulled out, worried that prices might fall.

We then visited our new purchase site and found that the work on site had clearly stopped 5 minutes after our visit before the holiday… the busy site had been staged for our benefit.

We could have proceeded without the sale but my confidence and trust in the developer was shaken and we pulled out.

It transpires the developer couldn’t raise the money and relied on our purchase to fund the development, the other ‘sold’ properties were not actually sold and they went bust.

We know what came next and the site was eventually finished about 5 years later but the standard was not what was promised and we realised we had really dodged a bullet.

Property development looks great in a rising market but can go horribly wrong when confidence is lost.

A land bank may ostensibly retain its value but if there is no liquidity the end result is generally bad news.