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- mattnz wrote:The AV Jennings release is particularly interesting. I often see the media accusing developers of land banking. It is the first time I have seen them defining this as a strategy. There is definitely something wrong with the model when a business strategy is based on having 5 YEARS of inventory!!! In any other business in any industry, having a stockpile of 5 years of inventory would be a surefire way to go broke due to its cashflow implications. Certainly not a just-in-time inventory system and not a sustainable business model. It is no wonder that land prices are very high, all the key players buy up all the available land in the areas which are being rezoned and limit the amount for sale. It is similar to how oil cartels worked in the 1970's to force oil prices up by 300%+.
Land Development is nothing like others businesses that can easily control inventory. A car manufacturer can stockpile steel in a just in time manner. A volume builder cannot. Land is a scarce resource. You have to buy it englobo, rezone it, get development approval and then produce the lead in works(roads sewer etc) This can take 5 years plus! You must have this avialble stock to enable a clear production line of houses. Otherwise you would be putting off your builders every year and have a lumpy profit and loss without sufficient cashflow. So this is why a 5 year land bank would give me confidence in a volume building company compared to one who had none!
Regards
Steve
Hi Ken
This is where a developer wants to reduce the risk and cost of the development by placing that risk and cost on you. For example by not settling on the property they are saving interest cost on any funds required to buy the land. In addition you are occurring costs due to holding the site for some time (e.g. interest forgone and rates).
Developers often take an option on the land by paying a percentage fee up front that is not refundable if the development does not go ahead. This way you are paid for the time the property is off the market.
If you want to be hard nosed about it you can ask for the full price and a percentage of the uplift he will make in the profit on settlement. You can do this by way of a contract.
Regards
Steve
