My first big investment mistake of the year came to light yesterday. In October last year I started to buy a holding in Persimmon (PSN). The outlook for the housing market seemed bright and the company was trading on a prospective p/e of 11 with a yield of 8.6%. Revenue and earnings growth were forecast for the next couple of years.
But Michael Gove yesterday put a spanner in the works of my decision process by announcing that the Government is going to force developers to fix the cladding crisis – initially by persuasion but if they don’t come up with the money by early March there is threat of legislation to force them to act. The share price of Persimmon dropped sharply as a result along with all the major public housebuilders.
In April last year the company said that they were “Committed to undertake fire remedial works on buildings constructed using cladding materials that may no longer comply with current Government guidance and building regulations; £75m fund created to cover developments identified”. In addition the Annual Report said this: “As announced on 10 February 2021, we have therefore decided that for any multi-storey developments we have built, we will ensure that the necessary work to protect residents is undertaken. Where we own the building, we will act to do what is necessary to keep the residents safe. Where we do not own the building, we will work with the owner and offer our support. Ultimately, if the owners do not step up and meet their obligations, we will ensure the work is done to make the buildings safe. To meet this commitment, we have recognised a £75m provision”.
This seems reasonable but the Government is now asking them to do more. In a letter the Secretary of State has asked companies to agree to:
- make financial contributions to a dedicated fund to cover the full outstanding cost to remediate unsafe cladding on 11-18 metre buildings, currently estimated to be £4 billion.
- fund and undertake all necessary remediation of buildings over 11 metres that they have played a role in developing.
- provide comprehensive information on all buildings over 11 meters which have historic safety defects and which they have played a part in constructing in the last 30 years.
See https://www.gov.uk/government/news/government-forces-developers-to-fix-cladding-crisis for the full Government announcement.
How did this devasting situation arise that has left hundreds of thousands of people with unaffordable bills to rectify defects and unsaleable homes? It all stems from the Grenfell Tower fire disaster after which it was discovered that cladding used was inflammable despite it being sold as meeting fire safety regulations. In addition it was found that many buildings had other defects such as inflammable insulation, inflammable balconies, missing fire gaps, or other fire safety defects so the total bill to rectify all affected buildings might reach many billions of pounds.
The Government has already committed £5 billion to rectification work but more is needed to cover buildings up to 18 metres high and big builders are being asked to stump up much of the cost irrespective of whether they were to blame or not. Clearly much of the blame should be assigned to those who manufactured and sold the defective cladding, or even the Government for not imposing and enforcing adequate regulations. Housebuilders are complaining they should not have to foot all the bill.
Will the actions of the Government even fix the problem? The devil is in the detail as it is unclear that the leaseholders will not still be left with bills beyond their means to pay and years of uncertainty while their properties remain unsaleable. One has to have sympathy with their predicament but I also feel that the big housebuilders are being unreasonably targeted. Those who were at fault should certainly pay the cost of rectification but the Government seems to be wanting to bully those with money to pay up by using the court of public opinion, and threats. This is wrong.
The Government should identify who was at fault and assign responsibility in a clear legal and regulatory framework. Otherwise there may be years of legal battles which will not help those who are suffering.
Perhaps the moral of this story is that it is always a mistake to invest in companies that might be affected by Government interference or political whims.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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