When the UK’s top eight stock-market-listed housebuilders announced combined profit writedowns of more than £1bn over three days to pay for recladding, investors might have been expected to press the panic button.
Not so, as Barratt, Persimmon et al decided it was better to play ball with an increasingly arsey government.
In the run-up to stock market announcements from 5 to 7 April, the top groups quietly bowed to pressure from levelling-up secretary Michael Gove by signing up to the government’s fire safety pledge for developers, introduced in the aftermath of the 2017 Grenfell Tower fire. This obliged them to pay for full rectification of any apartment blocks they had built over the previous 30 years. The total estimated cost was up to £1bn, on top of the £0.8bn they had previously agreed to spend.
Rather than cratering, the main companies’ shares ticked up by 2% during the week, having slumped by around a third from their peaks over the past 12 months. There was no doubt a collective sigh of ‘better the devil you know’ behind this mini relief rally. Critically, they were agreeing to remediate only those blocks of more than 11m in height and not, as some observers had supposed, picking up an open-ended tab of seemingly most of the £4bn to pay for smaller companies’ actions.
Three months earlier – with the Conservatives under pressure from ‘Partygate’, the cost-of-living crisis and slumping poll ratings – the normally affable Gove threatened draconian but unspecified sanctions.
On 10 January, he told MPs: “I am putting [housebuilders] on notice. If you missold dangerous products like cladding or insulation, if you cut corners to save cash, we are coming for you.” (Transport secretary Grant Shapps invoked similar sabre-rattling more recently, threatening, without much substance, to ban “sweatshop” P&O Ferries from British ports after mass sackings.)
A total of £1.7bn, or 4.2%, was wiped off the value of the leading housebuilders’ shares on 10 January. And the slide continued: an aggregate £9.3bn, or 23%, from the day before Gove’s broadside to 5 April, when Crest Nicholson was the first to ‘take the pledge’.
Admittedly, much of the fall in prices can be blamed on rising costs and looming interest-rate hikes – always the sector’s bête noire. But even if a quarter of the decline could be attributed to Gove’s rhetoric, it seems share prices have probably more than priced in the cost to developers.
Let’s start with the £760m in provisions accounted for by seven housebuilders in their latest results (Barratt, Bellway, Crest, Persimmon, Redrow, Taylor Wimpey and Vistry; Berkeley signed up without stating the assumed cost, if any). All but Persimmon increased those assessments in the latest round, a total of up to £1,114m. Knock off 19% corporation tax and this falls to £902m – so, added to the earlier £760m, £1,662m in total.
Although well below the supposed £4bn bill brandished by Gove, that sounds a lot, but the grouping’s net tangible asset value – the key metric used by investors to ascribe value to housebuilders’ shares – prior to any writedowns was £24.5bn. So, the decline was a fairly palatable 6.8%. Moreover, the eight named developers share net cash of £5bn.
Nevertheless, they still have to pay 4% of annual profits over the next 10 years into an amorphous Residential Property Developer Tax to pay for recladding towers above 18m, whether or not they built any of them. Barratt, which has built 139 blocks over 18m in the past three decades, was among the most exposed in the wider sector, as was Persimmon, with 33 blocks above 11m (it did not disclose if any were above the higher threshold).
Moreover, there is the legal and moral question of how much or little blame housebuilders share with manufacturers that produced the dangerous cladding panels, and – let us not forget – the government’s standards bodies and ministers themselves, who passed them as fit for purpose.
But as I suggested, delicately, in my Property Week column of 20 January, forget who is ultimately to blame; just remember that the government’s Help to Buy scheme has channelled more than £20bn of soft loans into the housebuilding market. This helped enable the construction of 330,710 homes, with a combined value of £92bn – a disproportionate amount of which flowed into the biggest groups’ balance sheets.
Sometimes it is best not to rock the boat too much – and investors seem to be voting with their wallets. As for Gove, he will have scored a few brownie points, which could serve him well if, as I’m starting to hear, he is being earmarked for home secretary in the next reshuffle.
Alastair Stewart is an equities analyst and consultant
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