Are developers making large profits from the tax payer?

publication date: Feb 13, 2019
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

Are developers making large profits from the tax payer?

BBC Radio 4 - You and Yours

A few weeks ago I was interviewed by Winifred Robinson about new build developers. Currently, they are making substantial profits, yet not delivering the 300,000 homes that the government wants built every year and, in some cases, the quality of new builds seems to be going down the pan.

Bearing in mind that developers have been supported by tax payers' money since the 2013 Help to Buy Scheme, You and Yours were asking whether people were getting a good return or if developers needed to do better.

Developer profits 

There is no doubt that developers are delivering good profits currently. But development is an incredibly 'boom and bust' business. For example, Barratt may have delivered profits of £408 million in the last six months of 2018 off the back of £2.1bn sales, but, 10 years ago in September 2009 they made a pre-tax loss of £680mn and had debt of £1.3bn. The previous year, profits were £140mn. 

It's true developers are doing well versus the downturn from 2007 to 2013 and the Help to Buy Scheme has definitely boosted sales, but surely it's better to have a profitable new build sector that can invest in more land and building more homes than one which is on its knees? 

Also, although developers are getting a boost via Help to Buy and the tax payers fund this initially, the buyer has to pay back the 20% loan and that may be more than the original amount borrowed, especially for properties bought before 2017. Once built and hopefully tax payers' money returned in the future, these properties are now available for several generations. 

And it's likely that these profits will wane this year as the property market is somewhat subdued, with the likes of Crest Nicholson already issuing a profit warning. 

Is the quality of new builds any good? 

Being honest, it really depends on how good the site manager and tradespeople on that site are. Some developers are keen to deliver cracking quality properties, but there are definitely others that don't take the level of care they should. 

For me, this is typically reflected in the House Building Federation's 'star rating' system where the likes of Barratt and Bellway achieve 4 and 5 stars, but Bovis are on 2 and Persimmon on 3. There are lots of other developers listed too and for me, this should be the first port of call for anyone that's thinking of buying a new home.

Bear in mind that each property is not always individually inspected, this is something you should do, using a qualified property expert who is a member of the RICS or RPSA to carry out a 'snagging survey' on the property. Only agree to complete if the snagging survey is acceptable or when any work required has been carried out, or you can agree to withhold part of the property's cost until the work has been done. And be very cautious about using a legal company recommended by the developer. Sometimes they can be good, but bear in mind a lot of their business may rely on a good relationship with the developer. 

It's much better to make sure the property has been built to a quality standard prior to completing than moving in and finding out there are issues afterwards, especially if the developer's tradespeople have left the site. 

One thing that does confuse people is that the HBF customer survey encourages people to report issues with a property, under their own 'snags report'. The stats for this are often reported as a 'bad thing', but in actual fact, a good developer would encourage a new property owner to report as many problems as possible. Unlike a car or a toaster, a property can't be tried and tested prior to being used, so problems do occur, even though, ideally, you are buying a new build to avoid issues, the trick is ensuring you have a quality builder that really works hard to fix problems. 

The best way to find out if a site has a good manager and the developer cares about the quality of the properties is to knock on doors of people that have already moved into a new build similar to yours and of course, have your own snagging survey done. 

Is the warrant provided any good or just a way of developers not having to do things?

Warranty providers such as the NHBC are there to help you:-

1. If the developer doesn't respond to your complaints 
2. To deal with structural issues two years after the property has been built 

The problem is that the warranty provider doesn't provide cover for everything to do with the new build,  they only provide specific protection against more structural issues. As such, you could have problems with the layout not matching what you thought you'd bought or drains in the garden when you had checked there weren't going to be any. Unfortunately a warranty provider wouldn't cover these issues. 

Prior to purchasing you should have received a big document explaining what you have cover for - and what you don't. The rest of the things that are not covered can be picked up by a snagging survey and when you visit the property prior to completing. 

If you aren't getting anywhere with the developer, the warranty provider is your next port of call and they should look after you, giving the builder time to carry out works and if not completed, get the work done themselves or make sure you are financially compensated to do it yourself. 

Make sure you take photos of any problems and fixes so you have a real record of any problems you have. 

Should there be a new Housing Ombudsman for new builds?

YES, YES and YES! This is a major problem when buying a new build. If the developer and warranty provider don't help you with any problems, you can go to the Consumer Code, but have to PAY for this service and typically pay outs are £250 or less. So if you have serious problems, you'll need to go to a small claims or other court, which can be expensive. 

Considering all agents have to be a member of an Ombudsman by law, it's astonishing that you can spend £200,000 or more on a new build which doesn't give you a free complaints system should things go wrong. 

Although the government has said it will introduce an Ombudsman, it may not be until later in 2019 and buyers of new builds need and deserve this level of redress now. 

Has Help to Buy pushed up house prices?

There seems to have been several reports which have tried to prove that Help to Buy has pushed up house prices, but I have looked into this and I find it difficult to isolate the increase down to purely Help to Buy. At the start of Help to Buy, I monitored quite a few sites which had previously been up for sale and didn't see any changes to prices when properties were then available under Help to Buy. 

Since the scheme was introduced in 2013, property prices have gone up in most areas around the country. Secondly, most Help to Buy properties are bought by first time buyers, but they aren't good at negotiating and often will pay a higher price. 

In reality, if developers were 'over charging' for a property, then the lenders and surveyors supporting their valuations would have to be complicit in this or they wouldn't be signing off the price to the first time buyers, so this wouldn't just be an accusation against developers, but lenders and surveyors too! 

With regards to developers' premiums, prior to 2007, developers were charging much higher premiums than they are today. These naturally get squeezed during a recession, then expand as demand remains higher than supply, BUT as stated above, this should be being curbed by lenders and surveyors. 

Overall, it isn't easy being a developer. One year you can be delivering great profits, the next massive losses - all through 'no fault of your own' if the economy tanks. They have to decide to buy land, spend 5, 10 years or more securing planning, then build the properties and they don't (typically) make money until they sell a property. Lots and lots of developers went bust spectacularly in 2007-09 and it's taken 6 years or more for them to 'get back on their feet'. 

Sadly, it's true that there are developers, or developments that aren't built well and the trick for consumers is to make sure they research how many stars the developer has achieved based on home owners' feedback and then make sure you have a good legal company and a snagging survey, both of which protect you - not the developer. 

And, if there is one thing that would make an enormous difference, it's a free, independent New Build Ombudsman and I very much hope that this is delivered sooner rather than later.

Listen to me on Radio 4 You and Yours (I'm on 13.55 minutes in)

Help to Buy a New Build - Barratt Homes New build homes snagging - LABC Warranty
Help to Buy a New Build checklist - Barratt Homes New build homes snagging checklist - LABC Warranty





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