Government scheme lets housebuilder triple profits in six years

house build defects
A surveyor will assess your new build home for defects

Negative publicity has dogged the highly profitable Help to Buy market, and the housing minister, James Brokenshire, is reviewing the continued inclusion of new build house building companies in the government’s Help to Buy scheme. 

The minister has been reported as having voiced concern over Persimmon’s practices, in particular, including its use of leasehold contracts and concerns over its leadership. Chief Executive, Jeff Fairburn, left Persimmon in late 2018 following the report of a £75 million pay award. 

Rising profits

The profits from new build houses sold by Persimmon under the Help to Buy scheme have risen steadily since 2012, when profit per house was £22,114. Despite the housing market slow down, profits tripled to £60,219 per property in 2018, making the company the most profitable house builder in the UK, with profits over £1 billion. Its success was due largely to the number of properties it sells under the Help to Buy scheme, which account for half of the 16,000 properties it built in 2018.

Share prices of the new build house builders, including Persimmon, Barratt Developments, Berkeley Group and Taylor Wimpey dipped, albeit briefly, after the the review over Persimmon’s continued participation in the Help to Buy scheme was announced.

Poor build quality and new homes sold under leasehold contracts

Persimmon is not the only house builder with a record of poor quality workmanship and selling houses with increasing ground rents, which have invited criticism across the new build housing sector, and new build house builders have been criticised for not fully explaining how leaseholds work to home buyers. Several of the new house builders have a history of poor build quality in the new homes they build.

Buying a house without its freehold is unusual, and a leasehold contract is more commonly used in the ownership of shared buildings such as flats. However, selling a property with a leasehold contract means the seller can yield even greater profits from the property buyer, who must pay a ground rent on the property. The house builder may retain control of the maintenance costs or can sell the lease on to another company, resulting in more expensive home ownership and making it potentially difficult for the property owner to buy the freehold in the future.

Management charges for future maintenance

The National Planning Policy changed in 2004, when developers were advised they could either transfer ownership of land to the local council and pay a sum for future maintenance, or arrange to maintain the public open spaces through a residents’ company. Those who did not want to pay a private management company for maintenance would need to buy property where a land transfer to the council had been agreed. However, Barratt homes has now been accused of not giving new build purchasers a choice, giving the impression that councils would no longer take on responsibility for management and maintenance.

Help to Buy review

Extensions to the Help to Buy scheme contracts will be reviewed shortly but, giving cause for Persimmon and other large house builders to up their game. In particular, they will need to improve build quality and justify the use of leaseholds for new houses, otherwise it is possible (although unlikely) they might even be excluded from future government funded schemes, where they would effectively be used to ‘make an example’ to the industry.

If you’re buying a new property, make sure you ask a Chartered Surveyor to check on your new home’s build quality by getting a Snagging Survey. The Chartered Surveyor will overlook the built quality and structural elements of your new property to make sure any remedial work is completed before you move in.

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