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Leasehold scrutiny could cost housebuilders

Taylor Wimpey has set aside £130m to help customers who bought homes with leases
May 4, 2017

Taylor Wimpey (TW.) has raised a few eyebrows by setting aside £130m to address problems associated with properties it sold on a leasehold basis between 2007 and 2011. In short, the freehold of some properties were sold on to an agent, and the terms of the lease were that ground rents were to double every 10 years for 50 years. The problem here is that there is nothing to regulate what the freeholder can charge if the leaseholder wants to buy the freehold. Other builders including Persimmon (PSN) have been selling a small number of leasehold properties, but it is understood that the terms of the leases are nothing like as onerous as those at Taylor Wimpey. Galliford Try (GFRD) sold a very small number of houses on a leasehold, but this was only when the houses were built on leasehold land. Additionally, the company's standard lease provides that the ground rent is set at the market rate, with reviews linked to retail prices index (RPI) inflation and no more frequent than every five years.

Taylor Wimpey has promised to attempt to reach an agreement with new owners of the freehold, or where this is not possible to pursue other avenues to help customers. The problem is certainly one for concern. One example cited an annual ground rent of £295, which doubling every 10 years would reach £9,440 a year in 50 years' time. However, in inflation-adjusted terms that would be significantly less.

It's also fair to point out that nearly all apartments are sold on a leasehold basis and that there are 1.8m leasehold properties in the UK. Potential buyers should be aware of the terms covering the lease, if not by studying them personally (and they can be complex if not opaque) then through the services of an expert in leasehold properties, or one of the many registered charities who work to protect vulnerable leaseholders.

There has been no mis-selling and Taylor Wimpey has acted legally all the way through, as have the agents holding the freehold. A decision to address the problem of onerous leases sold in those four years demonstrates its willingness to be seen to be acting in a reasonable way.

The big housebuilders have had rather a good time over the past few years, after a slow and painful recovery in the wake of the banking crisis. Pressure has slowly been building for more new homes for a variety of reasons, including population growth, lifestyle changes and a lack of supply of existing homes as people live longer.

By and large, housebuilders have maintained standards by resisting the temptation to accelerate output to meet this demand. In fact, it would be hard to increase output markedly for several reasons beyond their control, such as a shortage of skilled workers and planning constraints. Bovis (BVS) got itself in all sorts of trouble with build quality, which cost the chief executive his job. The new man, Greg Fitzgerald, having fought off bids from Redrow (RDW) and Galliford Try (GFRD), now has the task of rebuilding margins and reputation. One of the first steps has been to slow the level of completions; that's not good news for the housing market.

 

Small builders need a helping hand

All this comes at a time when there remains a chronic shortage of new housing, and when little appears to be being done to help small builders. Defined as building fewer than 50 homes a year, although most typically build fewer than 10, the market share of small housebuilders had fallen from 28 per cent in 2008 to just 12 per cent in 2015.

There are three main reasons contributing to the decline, and despite a string of proposals and incentives, none of these appears to have been addressed. The most serious challenge, identified by over a third of small builders in a report compiled by the National House Building Council (NHBC), remains the planning process. Costs associated with a planning application have risen steadily and decisions take as long as a year to come through. The report also highlighted the unpredictability and inconsistency of the planning process and often differences between officers within the same department. Equally challenging is the cost and availability of suitable land, and the only positive change in the past few years is the ability to raise finance.

All these challenges confront the small builder who lacks the sort of cash resources enjoyed by large builders to overcome these deeply ingrained problems. Most small builders only develop one site at a time, working on one while attempting to identify the next site. And while 58 per cent are optimistic about increasing output, this figure is down from 78 per cent three years ago.