Distressed US land grab
After absorbing staggering losses on their land holdings in past housing downturns, home builders have learned to limit risk by buying options on property instead of purchasing it outright. This time around, they have left other investors holding the bag -- and the fallout has only just started.
US home builders have taken billions of dollars in write-offs this year after relinquishing deposits on property they no longer need. That land, which is worth far less than book value, is now stuck on the balance sheets of a disparate group of property owners across the country.
Distressed US land grab
Published: October 16 2007 08:56 | Last updated: October 16 2007 08:56
After absorbing staggering losses on their land holdings in past housing downturns, home builders have learned to limit risk by buying options on property instead of purchasing it outright. This time around, they have left other investors holding the bag – and the fallout has only just started.
US home builders have taken billions of dollars in write-offs this year after relinquishing deposits on property they no longer need. That land, which is worth far less than book value, is now stuck on the balance sheets of a disparate group of property owners across the country.
These investment groups, known as “land banks” and which include GMAC, Acacia Capital, IHP Capital and Hearthstone, are backed by some of the biggest US institutional investors. Land banks with sufficiently diverse holdings may be able to muster enough liquidity and flexibility from lenders to ride out the downturn without dumping properties. But some developers, and their speculative backers, may not have that option. In their eagerness to sponsor projects during the boom, many investors took on extra risk by accepting smaller deposits from builders or looser deal terms. They now have too much property on their books, paltry deposits to show for it, and bank lenders breathing down their necks.
Some investors will have to sell properties to stay solvent, causing huge tracts of land to hit the market at distressed prices. Discounted properties have already popped up for sale in hard-hit Phoenix, Arizona and southern California. Some builders may walk away from more land options, if similar plots are offered so cheaply that the amount saved would offset forfeited deposits. But, as a growing number of investment funds probing the market have realised, this will mostly allow opportunistic investors to buy distressed assets at big markdowns.
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posted by Victor Lloyd Smith @ 1:29 PM
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