Why housebuilders make extortionate profits

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extortionate profit 

Governments have repeatedly looked to housebuilding firms to solve the housing crisis in Britain. They are part of the crisis and profit from it; they are not the solution. Average house prices in Britain have doubled since 2000. Eight developers build over half of the country’s houses. A study by Sheffield Hallam University found that in 2012-2015, the biggest private housebuilders increased construction by a third, but tripled their profits. The four biggest housebuilding firms in Britain are Persimmon, Taylor Wimpey, Barratt Developments and the Berkeley Group. The returns made on the capital they invested in 2016 were Persimmon 39.4%; Taylor Wimpey 30%; Barratts 27.1% and the Berkeley Group 41.1%. These are relatively high rates of return. Together, the four chief executives of these companies paid themselves over £30m in 2016. In 2017, five directors of Berkeley Group got over £3m each; Persimmon’s chief executive is in line to receive a bonus of over £100m. Trevor Rayne reports.

The crisis of capitalism means that the accumulation and expansion of capital have outrun profitability. Capital circles the world desperately seeking new sources of profits. Property in Britain has proved to be one such profitable outlet for surplus funds. A New York-based company, BlackRock Incorporated, is listed as a major shareholder in all four major British housebuilding firms. BlackRock is also a major shareholder in the estate agent Savills and in Britain’s largest supplier of materials to the construction industry, Travis Perkins. BlackRock is a global investment company and is described as the ‘world’s largest asset manager’; it controls almost $6 trillion of assets. Three of the housebuilding companies, Taylor Wimpey, Barratts and Berkeley Group, list the Edinburgh-based Standard Life Investments as a major shareholder, as does Savills. Behind housebuilding in Britain stand giant financial monopolies and the City of London.

Land is traded speculatively before being bought by would-be property developers. As the price of land rises, so the only adequately profitable developments become high-priced apartments and executive homes. A 2012 study commissioned by the Greater London Authority showed that firms that do not build controlled 45% of London’s development sites that had planning permission for new homes. These sites are owned and controlled by investment funds, overseas investors and owner occupiers, anticipating profitable land price rises before selling on to housebuilders. Lenders who fund housebuilding include the major banks and specialist firms. They typically demand a 20-25% profit margin for any project they fund and charge 12% interest on loans. All of this pushes up the price of a home.

Housebuilders are accused of operating land banks, restricting the supply of new homes to push up property prices. Housebuilders sit on land with planning permission, in order to maximise their profits. Five government reviews since 2004 claim that housebuilders do not use land banks speculatively. In 2017, the Local Government Association, representing local councils, identified sites for half a million homes in England which had been given planning permission but where no building had taken place. Housebuilders develop about one-sixth of the plots they own, compared with one-quarter to a third before 2008-09. In the mid-1990s, plots were held without construction beginning for about 2.5 years. By 2007 this had increased to four to five years and is now over six years. If these plots were used and properties built on them house prices would fall. In 2016 permission was granted for 250,000 houses to be built in Britain, but only 140,000 were started. Planning permission is granted at twice the rate houses are started. However, housebuilding firms blame bureaucratic delays by local councils for not starting building.

• Persimmon – built 15,171 new homes in 2016 and made £775m profit, up 23% on 2015, which means the average profit per house was over £51,000. Persimmon claims its land bank in 2016 was 97,187 plots and that it had £913m in cash reserves at the end of 2016, compared with £570.4m in 2015. The company chair, Nicholas Wrigley, was also vice chair of Rothschild London. Wrigley resigned in December 2017 after he admitted that the company chief executive, Jeff Fairburn, would receive over £100m in bonuses linked to share price movements and dividends paid to shareholders. Persimmon’s financial director and group managing director are also in line to receive £86m and £48m respectively. Overall, Persimmon will pay over £500m and up to £800m to 150 senior staff. Since the government introduced the Help-to-Buy scheme in 2013, Persimmon’s share price has quadrupled. With Help-to-Buy the government subsidises property buyers with a loan worth 20% of the price of a property, on properties selling for up to £600,000. More than half of Persimmon’s sales in 2016 were to Help-to-Buy recipients. The government has fuelled corporate profits and boosted executives’ incomes with Help-to-Buy, funded by taxpayers.

• Taylor Wimpey – built 13,808 new homes in 2016 and made £764.3m profit, up 20% on 2015, which means that the average profit per home built was over £55,000. Taylor Wimpey claims that its land bank in 2016 was 76,234 plots. The firm has paid out £737m to shareholders since 2014. Its chief executive is also a trustee of the homeless charity Crisis. Taylor Wimpey’s directors include the former Conservative MP Angela Knight and a former member of the Bank of England’s Monetary Committee.

• Barratt Developments – built 17,319 homes in 2016, making £682.3m profit, up 20.7% on 2015, which makes an average of over £39,000 profit per home delivered. Barratt claims that its land bank in 2016 was 71,351 plots, worth £2.88bn. When the government introduced Help-to-Buy Barratt increased its land bank by 6%. The firm’s directors include the chair of Tesco, a director of Royal Mail, a director of Debenhams, a trustee of the UK Green Building Council and regent of the University of Edinburgh.

• Berkeley Group – this firm focuses on housebuilding in London and the southeast; it claims to have built 10% of all new homes in London in 2017. In 2017 its profits before tax of £939.8m were up 34.5% on 2016 profits. Berkeley says it has built 19,000 new homes in the past five years, during which time it has made £2.26bn profits. This means that Berkeley’s average profit for each house built since 2012 is £118,894. The average selling price for a Berkeley home in 2017 was £675,000, compared with £515,000 in 2016. Berkeley says it has a land bank of 46,351 plots. Berkeley’s chair will receive £29m in 2017, up from £21.5m the year before. Berkeley’s directors include the president of the London Chamber of Commerce and Industry, a member of the Bank of England’s Residential Property Forum, a former editor of the Evening Standard, who also served as deputy editor of the Daily Mail and the Daily Telegraph, a director of Rolls Royce, a chief executive of the Crown Estate, which manages the Queen’s land and properties, and the vice president of the Wildfowl and Wetlands Trust.

Fight Racism! Fight Imperialism! 262 February/March 2018