Profits at major house builders suggest that building more affordable homes in London is possible
Currently, private developments in London are only delivering 13% of their new housing as affordable housing. Most London boroughs have a requirement that 40-50% of housing on new developments is classed as affordable.
The argument often put by the house-building lobby is that developers struggle to make a profit on their developments. The argument that follows, is that if the Mayor or other planning authorities insisted that house builders build the required amount of affordable housing, building would stop because developments would be rendered financially unviable.
Many policy makers in the capital appear to be have been captured by this argument. In conversations with officials and consultants responsible for implementing planning policies, affordable housing requirements are often described as an ‘aspiration’ that must be ‘flexibly’ to encourage development.
A recent exchange along these lines with a policymaker in City Hall prompted me to go and look at the facts.
I looked at the annual accounts of the top five house builders in the UK over the last five years. As can be seen clearly in the table below, profits have exploded. In total, the top five house builders in the UK have seen their post-tax profits rise from around £354m in 2010, to £2bn in 2015. This is an increase of 5.5x over 6 years.
What is also remarkable is that in 2010, which is a year when house prices were in decline, only one house builder in the top 5, Barratt, made a loss. The others were all making profits, even in one of the worst years in recent times for the industry.
| In £ ,000 | 2015 | 2014 | 2013 | 2012 | 2011 | 2010 |
|---|---|---|---|---|---|---|
| Barratt | £450,300 | £305,400 | £141,800 | £78,100 | £25,500 | -£23,900 |
| Taylor Wimpey | £489,800 | £374,400 | £239,800 | £228,600 | £55,900 | £174,700 |
| Persimmon | £521,900 | £372,000 | £263,000 | £162,200 | £109,000 | £115,300 |
| Berkeley | £404,100 | £423,500 | £292,900 | £209,000 | £158,147 | £94,456 |
| Bellway | £71,042 | £54,578 | £32,355 | £26,026 | £17,018 | £8,620 |
| Total | £1,937,142 | £1,529,878 | £969,855 | £703,926 | £365,565 | £369,176 |
The sharp increase can be seen even more clearly in this chart which shows the cumulative profits of the top five.
Some of this profit can be explained by an increase in house building. More building means more profits. However if we look at the sales margins of developers, the amount they make on each individual sale, these too have increased sharply since the dark days of 2010. In all, house builders’ sales margins have increased by around 10% from around 15.5% to 25% on average, as can be seen by the table below.
It is also worth noting that the profits seen by Berkeley Homes are way out in front of the rest of the major house builders. One reason for is that Berkeley concentrates on London, where the out of control housing market allows for even greater profit levels.
Congratulations on this. (NB there’s a digit (?2) missing from the 2015 total in the table. Doesn’t affect the argument or charts.)
Thanks Michael. Was just surprised that few people in city hall seem to have looked for themselves. It is really quite a simple calculation. It is all in the accounts!
I recently learned, to my horror, that HMO conversions are counted in affordable housing developmemt figures! Think of it: destroy a small family home to create 6 tiny bedsits and you’re helping solve the housing problem….
Good work George, again.
Policy doesn’t seem to be based on economic facts. One detail worth mentioning is some of the post tax profit increases will come from Coroporation Tax cuts from 28 to 20%. But the point still stands, better off companies are delivering less. Apparently, since developers’ profits have gone up, sometimes recently they’ve accepted reductions in their gauranteed margins in viability appraisals, from the 20% standard to as low as 17%, but now they argue Brexit dangers mean they need 20% again like post-2008. It would be interesting to know what the standard margins are for other sectors. What other sector gets gauranteed margins? Maybe cocaine!
Their risk arguments do hold water, to an extent, in the current wharped policy environment, in that their business model depends on sales. Prices are unlikely to go down outside of prime London, but how quick they can sell volumes in uncertain times is a credible concern – something that’s very solvable by government guarantees to buy unsold properties if necessary and convert them to rent, (which has zero risk given chronic undersupply), at least temporarily. The HCA are toying with that, backed up by virtually no cash. So a lot of developers ‘risk’ problems stem from a disorganised and deliberately pauperised state, especially skint councils, partly because of cuts to Corporation Tax! But they’re too miopoic to see that they’re hung by their own lobbying for lower taxes.
At some stage we should talk about estate regeneration – there’s so much that needs covering – but I’m not quite ready yet, and the policy environment is about to get clearer. Let me know if you’re interested…Meanwhile, keep at it.
Glenn
Tower Hamlets
When I was on the Planning Committee of a London local authority, the developer would come in with a nice promise. All the protocol and formalities had to be gone through over what was sometimes many months; and then, just before the building was about to start, they would say that some circumstance or other meant that they couldn’t possibly run to e.g. 10 social units; now it would have to be five. If we had argued, we would have ended up with nothing. The system is barmy.