House builders' write-downs could rise to £13bn

House builders’ landbank write-downs, already standing at a figure £2bn, could jump as high as £13bn if the woes of the housing market are faced head-on, according to City analysts.

That sort of pain would totally cancel out the entire profits logged by the UK’s top six house builders over the past decade.

And that in turn might get the Financial Reporting Council hot under the collar as it has already indicated that write-downs and impairment related to land assets as being an aspect that is in line for “particular attention” this year.

Thus far, there is a world of difference in the approach each of the top six has taken, with Redrow leading the way in terms of the severity of its approach

The Financial Times today reports comments by Mark Hake, analyst at stockbroker Merrill Lynch: “A key difficulty in any attempt to assess what comprises fair value for a house builder’s landbank is that each of the groups which has undertaken such an analysis has applied a differing approach.”

This opportunity exists because the law allows for a broad set of possible accounting parameters.

Of the £2bn written off thus far, the biggest chunk was the recent £600m provision announced by Persimmon.

Stockbroker Panmure Gordon’s analyst expects another £5bn of write-downs by 2011, including the cuts announced thus far.

Merrill is far more aggressive, taking a more bearish accounting treatment and coming to the conclusion that another £9.9bn of landbank write-downs will be needed.

But that figure keeps rising to:

• £11.3bn when write-down on goodwill is added; and 
• £13.3bn when impairments previously recorded are included.

The FT explains that the £13.3bn write-off outlined by Merrill would exceed the £11.3bn of pre-tax profit reported over the past decade.

The FT comments: “You have to question whether house builders delivered any added value by building houses as opposed to just reaping profits by sitting on their land banks. Until the whole write-down exercise is over, we won’t know.”