Empty buildings won't disappear - there will be bargains

Jul 2 2008 By Nevill Boyd Maunsell, Economics Editor

Most days I drive past a large urban site. A couple of decades ago it housed the local football club and its rather tacky stadium.

Then the football team started doing better and they put in a planning application for a grander, noisier stadium and everything that would go with it, fans and their traffic on match days. The council turned it down and the football club moved off.

Next came successive applications to build “superstores”.  Those were still the days when local shopkeepers could see off that kind of thing.
And they did.

Finally, John Prescott decreed that homes should be run up, as densely as possible, on every “brownfield” site in the land.

Today’s result: Some 300 unfinished flats in an uninviting spot with poor access to public transport. The roofs are on, but no sign of glass in the windows or cladding on the breeze block walls – nor of much work, come to that, these past few weeks.

This eyesore is an “asset” on some company’s books. I don’t know which, because it has taken care to keep its name off the hoardings.

Some bank, no doubt, has it listed as security against a loan.

If the credit crunch had never happened, the flats might have sold for silly prices. But this time last year there was already talk of a glut of such things.

As things are, it will be a long time before they become the kind of asset that does their owner any financial good.

Now the stock market has taken fright at Taylor Wimpey’s failure to sweet-talk £500 million out of its big City shareholders, along with the loss of its finance director.

Without that top-up, there is every possibility that our biggest house-builder will breach its banking covenants next February. There was excited talk of other builders being in the same mess, or worse.

If so, where does that take us?

You can take it too tragically. The whole construction industry, not just the house-builders, accounts for only six per cent of Britain’s gross domestic product. Its woes, on their own, should not drive us into a recession.

True, the banks can do without another round of write-downs on their loans to house-builders.

If the stock market has it right, these builders are all struggling. Some will go bust. But their physical assets – land banks and part-built homes – will not vanish. Relieved of inflated valuations – and debts to match – they should become readily saleable. Along the way, though, it looks as if some of these physical assets will become the property of banks.

If they dump them, as they did in the early 1990s, they will only make things worse. But there is no God-given law that the same banks must make the same mistake 16 years later.

Who prospers in the process, it is too soon to guess. But somebody will. One theory is that if you must buy a house-building share as a penny stock, buy the lot.

That way you will have the big winner, no matter what happens to the rest. It is said – suspiciously vaguely – to have worked with Californian tech shares during their great Millennium crash.