House builders are being forced to consider how much value their land holdings may have lost since the start of the downturn, a move that most agree will lead to large asset write downs starting in next month’s reporting season.
With half-year figures four weeks away, developers privately admit that some of the sites they bought in recent months are now unlikely to turn a profit, a point at which accounting standards demand they make a non-cash adjustment to their accounts which will translate into diminished earnings.
Although few of the builders publicly comment on the issues, analysts covering the sector have little doubt that potentially large write downs will be unveiled.
Jan Crosby at KPMG points out that 'land isn’t revalued on the way up, when rising land prices led to high profits for builders. Like in any industry, you would only write down an asset if its value has deteriorated to the point where you’re going to make a loss at gross margin level.'
That now looks likely for recently acquired plots at least. Although the market for land is virtually dormant, making valuations more difficult, an industry rule of thumb suggests that swings in land prices are three to four times greater than those seen in the housing market.