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An increasing number of construction firms are offering their services to banks that have found themselves saddled with uneconomic housing sites.

Land prices in some areas have risen 20-30% since their nadir in 2008, despite housing market uncertainty in the past month. Analysts say this has prompted banks to look at ways of capitalising the land on their balance sheets.

Firms are offering a number of solutions, ranging from assessing a site鈥檚 potential to building it out for low cost and risk (see below). The total value of the market is unclear, but it is thought to be large. Jan Crosby, head of construction at KPMG, thinks their total exposure is in the region of 拢15bn. Savills estimates the value at 拢22.5bn.

Suddenly the value of land has hit a point where the banks are not losing money if they sell

Jan Crosby, KPMG

Banks鈥� exposure to 鈥渄istressed鈥� residential land comes in many forms, either as investment in, or loans to, individual developments, or, in the case of HBOS, investments in and loans to housebuilders and developers themselves.

Crosby says: 鈥淲e鈥檙e at an inflexion point. Banks mostly now know what鈥檚 on their balance sheets, and suddenly the value of land has hit a point where they鈥檙e not losing money if they sell. They鈥檝e also got their heads round the kind of joint ventures they can set up to work the land out.鈥�

However, so far they have shown little inclination to do anything with it. The problem is that if they sell the land, they have to write down the value on their balance sheet, and this will be about 20% less than their return if they developed it. On the other hand, if banks do opt to develop their land, they have to invest more money in a project that is already underwater, at a considerable cost in staff resources.

The firms moving into this market are trying to come up with sophisticated responses to the banks鈥� dilemma. This is partly to stimulate them into doing something with their land: up to now they have preferred to leave sites with their present management.

Yolande Barnes, research director at Savills, said that is partly because the banks, which acquired much of the land as they were making redundancies, took a long time to get a sense of what they owned. She said:

鈥淟ast year, vulture funds were all over the place, but they only wanted to pay 30p in the pound. The low interest rates meant that, for the banks, it was much better to roll debts over than to foreclose.鈥�

When the floodgates open this will be huge. it could create another whole industry

James Byrne, Ardmore

However, in places where the relationship between a bank and the developer has collapsed, or where the management refuses to co-operate with what is effectively the winding down of the business, banks may be looking to bring in outside help.

A joint venture between contractor Ardmore and regeneration developer First Base is one of those bidding for work. James Byrne, director of Ardmore, said the firm was working with an Irish bank on two schemes and is making contact with Nama, the 鈥渂ad bank鈥� set up by the Irish government to take on foundering projects. 鈥淲hen the floodgates open this will be huge,鈥� he says. 鈥淭his could potentially create another whole industry.鈥�

The main question is whether the banks are ready to act. Russell Legg, director of housebuilder DeVirgo, which was created to take advantage of these kinds of opportunities, believes they are.

He said: 鈥淭he banks have assessed everything they have and put it in order - essentially they have a funnel and the sites which are easiest to do will come out the bottom first. Some sites, maybe with permissions for flats in areas of overload, won鈥檛 be developed for five years. But where the permission is relatively low-level and straightforward, we can do that now.鈥�

DeVirgo has a joint venture with RBS and is building out 150 plots this year, mostly on land in the South-east owned by Frontier Homes, which sold its 1,000-plot housing business back to the bank in 2009.

The rise in house prices mean that many sites bought before 2007 can be built out without a loss. The key is for the bank to be able to do this with minimal additional investment or risk, which is why joint ventures are being sought. Crosby says: 鈥淚f they go for a joint venture it enables the bank to de-risk the build out. If you can get someone to manage it on your behalf and it can generate a pot of cash, then it鈥檚 a no-brainer.鈥�

Crosby added that the planning hiatus that followed the election was making sites with planning permissions more attractive.

However, some are sceptical about whether banks will move en masse to develop distressed land. For Savills鈥� Barnes there remains the question of the sites that were bought at such high values, and with such different density expectations, that they will never be able to be built out without huge writedowns.

鈥淭he question is how much of the really toxic stuff there is - the stuff that is so underwater there鈥檚 really nothing you can do.鈥�

There鈥檚 also the question of how convinced the banks are that the industry is ready to respond; they have proved sceptical of ventures that look opportunistic.