Big builders need a constant diet of land to keep their mighty pipelines filled. And they need a steady stream of land to benefit from even-flow production and grow their market share. In today's world, it takes years to gain all necessary entitlements and approvals. So, years of land to feed production are a must. Thus, the decision to chase deals and build land positions has long been a no-brainer. After all, the float that builders derived from appreciating land fattened margins and lifted earnings. Now, though, some worry that the price appreciation tide may be turning.
BANKING ON LOWER RISK Banking land equates to financial risk, and taking down land means bulking up on the balance sheet. So, big builders are turning to old and new methods to manage risk. From joint ventures to diversifying land holdings across a growing number of divisions to creatively crafting options, builders are tying down land without as much carried on the books. A recent survey of large builders by the Joint Center for Housing Studies of Harvard University found that the use of joint ventures is up sharply over recent years, followed closely by expanded use of options and off–balance-sheet financing mechanisms.
But, because land is still essentially a relationship business, many local land owners and brokers prefer to deal with regional and smaller local developer-builders with whom they have a track record. What's more, regional and local players usually have the authority to commit to land deals, while the divisions of the national companies may not. Harvard's survey found that the share of corporate offices with employees on the payroll for land acquisition and development decisions shot up from about 50 percent to 67 percent from 1999 to 2004. The share of head offices with land entitlement staff surged from 42 percent to 53 percent.
REAPING BENEFITS OF SCALE So what can the large builder do to reap the benefits of land banking while minimizing both financial and relationship risks?
On balance, big builders are in a strong position. While they may fray some relationships because of the corporate overlay, it's that same overlay that brings them beneficial cash, discipline, and risk diversification. In up markets and down, this should serve the large builders well if they play their cards carefully.
Corporate Agenda Sixty-three percent of respondents highlighted land acquisition as the item that, from a corporate perspective, most increased in importance between 1999 and 2004.
SOURCE: JOINT CENTER FOR HOUSING STUDIES