Falling land value adds to housing woes

Jonathan Hook, UK construction and house building leader, PricewaterhouseCoopers

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It's a sure sign of the doom and gloom in the housing sector that some of the industry's major players have been writing down the value of their land. By Jonathan Hook

The process at the big three has been interesting to watch. Barratt said that it had carried out a site by site analysis with an assumption of a further five per cent decline in prices in 2008/09 leading to an estimated £85 million write down.

This was 1.6 per cent of the value of its December 2007 land and work in progress.

Taylor Wimpey took a £550 million write down in the UK, plus a further £110 million in the US and Spain, 11 per cent of its December 2007 land and work in progress value.

But Persimmon announced no significant write downs, with a comment that one would only be in the "tens of millions" if required. Land and WIP in December 2007 was around £3.3 billion, so we might be looking at one per cent to two per cent of value.

Accounting standards require firms to carry inventories at the lower end of cost and net realisable value.

The key judgement for firms is what is net realisable value – the two approaches are to either assume that you continue to develop a site out and make judgements about selling prices and costs over the next few years; or to assume that you write land down to the price in the market today if you were to sell it.

Either approach is valid if it's consistent with your intentions for the development.

It is inappropriate to hold values based on a forward looking assumption when there is no intention to develop out or even planning consent to do so.

That said, what you also should not do is take a 'kitchen sink' provision on your land costs now when your intention is to develop a decent margin in the future.

If some big exceptional write downs are booked it will also be interesting to watch whether, when the market picks up again, these provisions reverse in the same way or quietly flow through normal trading.

The Financial Reporting Review Panel has already earmarked the house building sector as one it is monitoring with interest.

Jonathan Hook is UK construction and house building leader at PricewaterhouseCoopers