The gap between large and small homebuilders widens | Bedford Hills Real Estate

The 14% increase in land values during the first three quarters of 2012 was four times greater than the rise in house prices, Capital Economics said in a new report.

The report calls the rising cost and reduced availability of building materials, labor and land “thorns in the side of the homebuilding recovery.” But for some homebuilders, this has widened the gap of success between large and small homebuilders. 

In its 2012 annual report, Toll Brothers ($30.91 0.61%) writes, “Our financial strength gives us a competitive advantage over the small and mid-sized private builders in our luxury niche whose access to capital and land remains constrained.”

Despite plenty of anecdotal evidence that many of the lots, which are ready for building, are generally far away from city centers, according to Capital Economics, Toll Brothers says its philosophy has always been to acquire exceptionally located sites. 

In its annual report, Toll Brothers writes, “In contrast to the just-in-time model of some land-light builders, we often take this land through approvals while we have it under option and then improve it.” This helps increase the company’s profit margins and enables it to position the company for the future.

Another large homebuilder, Lennar Corporation ($38.17 0.94%), has dedicated a large amount of its spending toward purchasing land. 

“Against this backdrop of recovery in the housing market, we have continued to be a very active land purchaser spending almost $500 million on land in the first quarter,” said Start Miller, CEO of Lennar Corp. in the builders’ first-quarter report.

He added, “We are well positioned for 2013 and 2014 so our land focus is now primarily on homesites for 2015 and beyond.”

Publicly traded homebuilder Meritage Homes  ($41.56 1.79%) has also been actively buying land since 2009.

Meritage Homes’ CEO wrote in the company’s 2012 annual report, “Based on our better-than-anticipated growth in 2012 and expectations for this recovery to continue for several years, we invested approximately $480 million in land and development during 2012.’

The company ended the year with almost 21,000 lots, representing a five-year supply based on its trailing twelve months’ closings, according to its annual report.

The financial strength of these large homebuilders continues to give them a competitive advantage against smaller builders.

“We believe our land positioning strategies have helped to pave the way for achieving future growth and profitability,” said Toll Brothers, who spent $106 million on land development in 2012.

“The opportunity to purchase substantially finished lots in desired locations is becoming increasingly more limited and competitive,” the builder said. “As a result, we are spending more dollars on land development as we are purchasing more undeveloped land and partially finished lots than in recent year.”

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