McCarthy & Stone shares drop on government housing reforms

McCarthy & Stone shares fell even further behind the rest of the housebuilding sector today as it found itself caught in the crossfire of the government's crackdown on leasehold practices.

The retirement builder was fiercely critical of the plan by the Department for Communities and Local Government (DCLG) to ban leaseholds on almost all new-build houses and to require ground rents on new long leases to be set at zero.

It said it had already made a strong case to the DCLG for an exemption for retirement housebuilders, particularly as the company does not employ the escalating ground rents that have been the subject of the review.

McCarthy & Stone shares, which have underperformed the rest of the housebuilding sector this year, were down by 8% at 155.9p. The slide has wiped out almost all of the company's gains for this year.

Other housebuilders were more resilient following the news, with declines for Persimmon and Berkeley Group pegged at below 1.5% in the FTSE 100. Bellway was down by less than 1% in the FTSE 250.

Overall, housebuilders have outperformed the rest of the market by around 30% in 2017, helped by government schemes such as Help to Buy and strong demand from first-time buyers.

But it's not been so rosy for McCarthy, which recently reported a slight drop in annual profits to £92.1 million as uncertainty caused by the Brexit vote in 2016 affected orders in the early part of the year.

Today's shares slump came as the company disclosed that it expects to generate profits of around £33 million from the aggregating and forward selling of freehold reversions (ground rents) in 2018.

This profit stream is recognised in the price at which McCarthy bids for land, as well as used to help fund communal areas and facilities.

The rent in retirement apartments can be higher than mainstream apartments because they include more communal facilities, which are not saleable as they are retained for the use of all homeowners.

McCarthy warned that the potential change to the structure of ground rents will be immediately reflected in the cost of land secured for development.

If the group is unable to secure exemption from the measures announced, McCarthy will seek to mitigate the short-term impact on its current land bank, including through price renegotiation and management fee reviews.

The company added that its ground rent charge was necessary to ensure the long term maintenance of its developments on behalf of elderly homeowners.

It said: "These ground rents have been long-established on fair and consistent terms, with rental growth linked to the higher of 2% or RPI."

Chief executive Clive Fenton warned that the DCLG proposal will result in a disruption of housing supply.

He said: "We understand and support the need for action to address leasehold housing and aggressive escalation clauses for ground rents, however this blanket approach will result in reduced housing delivery as well as choice for ordinary people."

He pledged to continue working with the DCLG "to ensure they recognise the importance of retirement housing in the face of an ageing population."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.