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Persimmon highlights Help to Buy crutch

Daniel Lane

Daniel Lane - Fidelity Personal Investing

UK housebuilder Persimmon this morning posted profits of £1.1 billion, becoming the first UK company in the sector to reach the milestone.

Persimmon highlights Help to Buy crutch

The record figure came as the FTSE 100 firm grew profits by 13% during the year, up from £966 million in 2017, largely aided by its participation in the government’s Help to Buy scheme.

Designed to help new, and mostly first-time, buyers get on the property ladder, the scheme has allowed housebuilders to complete new developments in the knowledge that government funds will cover up to 20% (40% in London) of the purchase price.

Since Help to Buy was introduced in 2013, Persimmon’s profit per house built has risen significantly from just over £22,000 in 2012 to over £60,000 in 2018, with almost half of the 16,000 homes built by the company last year being sold under the scheme. Investors will therefore be conscious of housing secretary James Brokenshire’s review of Persimmon’s inclusion in the scheme after a string of complaints over the company’s leasehold agreements and build quality.

Governmental review aside, today’s results show just how important Help to Buy has been for the bottom line of the UK’s housebuilders. Perhaps more importantly, Persimmon’s record profits spark the discussion of how precarious the sector’s fortunes might be when the scheme is renewed in April 2021.

Are we nearing peak housebuilder?

Help to Buy allows housebuilders to design and construct homes to sit at the top of the price threshold of £600,000 in London, knowing a deposit of 5% will be more manageable for younger buyers, and the government is on hand to take on 40% of the overall cost.

Should a review find that prices have been inflated or build quality is not consistent with prices, housebuilders may be forced to put more money into the overall construction and finish of new-builds, or risk losing out come contract renewal time.

Further scrutiny over providing leasehold agreements, which see buyers paying further ground rent charges, could also detract from future profits in the sector.

As such, greater restrictions on how companies approach the scheme could split the pack from 2021, according to the extent to which firms are dependent on buyers reaching them through Help to Buy.

There is also the issue of London’s housing market seeing steady declines in house prices over the past two years. With the capital accounting for the lion’s share of all housebuilders’ apartment sales, investors will be keen for any insight into increased demand in Thursday’s House Price Index report from Nationwide.

Brexit uncertainty

The UK’s impending departure from the EU is also weighing heavily on the outlook for the sector. Earlier this month FTSE 250 housebuilder Bellway put a rise in its cancellation rate from 11% to 13% down to Brexit fears affecting consumer confidence. Competitor Redrow also said its sales had been ‘negatively affected’ at the end of the calendar year, directly blaming political uncertainty surrounding Brexit.

The market will be waiting to see if Taylor Wimpey and Bovis Homes follow suit in their results later this week, with equally cautious Brexit commentary, and whether plans are in place to ensure their inclusion in Help to Buy come 2021.

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