Persimmon described it as a homebuyer’s “retention”, but could have called it the Jeff Fairburn memorial clause. Buyers of Persimmon houses will be able to withhold 1.5% of the purchase price, or £3,600 on average, until the builder has fixed any faults. It is an eye-catching gesture designed to combat Persimmon’s reputation for corporate greed, as embodied by Fairburn’s infamous £75m bonus.
Even government ministers seem to have noticed that bonanza and decided to take a look at Persimmon. They found a company making £1.1bn of annual profit, thanks in large part to the government’s help-to-buy scheme, but generating a disproportionately high volume of complaints from customers.
Persimmon lost its Home Builders Federation four-star rating for customer satisfaction, regarded as the bare minimum for a major housebuilder, in 2014 and has yet to regain it. For a government desperately scratching around for reasons to justify another round of subsidies for first-time buyers, it looked terrible. Cue muttering from ministers about banning Persimmon from help to buy, even if the legal basis always sounded a little hazy.
The warnings, though, will have been heard in the boardroom. The post-Fairburn crew (even new chief executive Dave Jenkinson, who trousered £40m himself) have been banging on about the need to be nicer to customers for a while, but there’s nothing like a threat to profits to force some concrete action. The retention arrangement won’t apply until the end of June, so looks to have been announced in haste, but at least it shows willing.
One could quibble about the level of retention: £3,600 for a company that made £66,000 profit per house last year looks low. But the principle is surely sound. Why should the customer pay full whack before the builder has delivered what it promised?
Indeed, the government could make retention clauses obligatory for all housebuilders that wish to take part in help to buy. Rivals, who all blame Persimmon and Fairburn for spoiling a good party, would hate that. But why not? Help to buy, by rights, should be cancelled on economic grounds but, if the government really is wedded to the scheme until 2021, at least attach a few protections for customers.
Lord Wolfson’s touching trust in market forces
Forget the relatively cheerful Brexit update from Lord Wolfson, chief executive of Next. He’s probably right that consumers are “numb to the daily swings in the political debate” and are declining to be alarmed by Brexit uncertainty, but he was speaking only about his retailing world. Even a pro-Brexit boss might have a different take if he were building motor cars.
Instead, the provocative material in Wolfson’s always-lively dispatch to shareholders was about rents in shops. For landlords, the analysis will read as a nightmare beyond any Brexit-induced terrors.
Next modelled annual 5% cuts in market rents from 2022 into the middle distance, meaning 2034, at which point £100 of today’s rent would become £41. Is a 59% decline plausible? It’s a scenario, not a forecast, stressed Wolfson. But, yes, 5% a year must be credible for a couple of reasons.
First, like-for-like sales fell 8.5% in Next stores last year, which has become the norm. All retailers would seek to reset their fixed overheads in that climate. Second, Next is succeeding in that effort. It secured rent reductions of 29% on the leases it renewed last year and expects more of the same this year.
Can’t the beleaguered landlords switch their over-rented shops into offices or flats? Wolfson gave that popular argument short shrift by demonstrating that, once you include conversion costs, the real rental floor lies lower than assumed. Besides, on retail parks, which is where many Next shops are found, there is no demand for offices.
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We have grown used to hearing dire warnings about rents from struggling retailers – Debenhams and so on. But Next, boasting same-again pretax profits of £723m with the help of its huge online operation, is different. It is not pleading for lower shop rents. Rather, it is expecting them to be delivered by the simple operation of market forces. “We do not have too much space, we have too much rent, rates and service charges,” says Wolfson.
The stock market already values many retail landlords at 50% of their supposed asset value, so the direction of travel described by Wolfson will not come as fresh news to investors. But are 50% valuations low enough? Read Wolfson’s analysis and you would not think so.