England’s attachment to its ancient feudal system lives on in the country’s outmoded property laws. Owning a home does not always mean owning it outright. About one quarter of the English housing stock consists of leasehold properties, from which the land owner, or freeholder, can extract considerable sums. Tolerance for complicated leasehold arrangements is waning. Taylor Wimpey has twice fallen foul of the shift in attitude.
The housebuilder’s decision to amend an unusual clause is proof of the change. In the original agreement, freeholder London Legacy Development Corp could have terminated leases sold by Taylor Wimpey if the latter became insolvent. There is no real reason that LLDC would want to terminate the leases. Why give up a recurring source of income? But Barclays considered the complication a risk too far. The bank announced that it would not lend mortgages on the development.
Such forfeiture clauses are not an anomaly in property development. What is noteworthy is that Taylor Wimpey has rolled over so quickly. Its decision was probably not entirely unrelated to the £130m provision set aside to amend leases charging expensive ground rents last year. Better to rewrite these than face complaints and charges in the future.
For now, the company is benefiting from a slight lift in sales prices, which made up for a 2 per cent dip in home completions in the first half of the year. But the cost of building homes is rising. Nearly one-tenth of the people employed by the industry are EU nationals, according to the Royal Institution of Chartered Surveyors. A reduction in available workers following the UK’s vote for Brexit means higher wages and greater construction costs.
Housebuilders have done far better than estate agents in the past two years thanks largely to the UK government’s “Help to Buy” subsidies. Still, no one is immune to London’s sluggish housing market. Taylor Wimpey‘s enterprise value is 6 times ebitda — down from 7 times last year.
The company should be commended for moving fast to change controversial leases. The legal department, which shows all the hallmarks of being too clever for its own good, has hopefully learnt its lesson. Taylor Wimpey should stick to building houses. Radical reform of the leasehold system is unlikely unless a Brexit-beset government comes under more pressure.
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