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Wednesday, 2 July 2014

A Public Bailout

The Economics of House Building and the Plemont Decision
The cost of building a house if they are shipped in pre-constructed from Poland (and thus built to survive a Polish winter, a much higher spec than say Dandara properties) is in the region of £85,000 with probably £15,000 to lay the foundations and to connect all essential services. So we can assume since building firms choose not to use these properties that the cost of building in Jersey is less than £100,000 per 3/4 bedroom property.
Take note when you see new builds advertised for £650,000 just how much profit the developer is making per property!
Turning to Plemont. All the houses would have been built on what is currently green and the green area in the middle would have been laid over what is currently built on.
The cost of removing the asbestos is in the region of £1 million. The cost of levelling the existing buildings and digging out around £200,000
So the cost of destruction and construction assuming these were high quality dwellings would have been in the region of £4 million
Maintenance costs were cleverly to be passed onto the taxpayer as the 'public area' in the middle of the housing estate would have been maintained by the Parish of St Ouen. I am sure the residents would not have looked favourably upon strangers using "their green". Of course they would have paid rates to St Ouen so maybe it was going to be cost neutral to the Parish.
John Hemmings, owner of the Plemont Holiday Village, quite simply made a bad investment decision. He acquired the site as part of a package from Scottish & Newcastle breweries 15 years ago. The cost I cannot be sure of but appears to have been around £2 million.
Add onto that 15 years of failed planning applications with all the associated architect fees and planning taxes and associated costs. He also acquired all adjoining fields so there was no 'neighbour' to object to the plans. Let's assume this totalled £1.5 million
For a total cost of the development of £7.5 million
His plan was to sell the houses for £800,000 each (a little unrealistic but that is what he said) take off the Court taxes and agency fees and discounts and sweeteners and he would probably have received a total of around £17 million.
After tax he would have netted say £7.5 million.
As it stands he has accepted £7.3 million plus £50,000 for the option to purchase paid for by the National Trust.
The costs already borne amount to £3.5 million so he has come away with £3.8 million tax free as it is a capital gain and not subject to tax.
Since we can assume that this was a business decision and that this deal represented the most advantageous option that puts the developers realistic sale price of each house at £425,000
The States until recently were helping people to get mortgages of up to £410,000.
A number of estate agents have said that this was forcing people to drop the value of their houses to £410,000 to achieve a sale, this is absolute nonsense, a house is only worth what someone is willing to pay for it. SO in fact the States were artificially inflating the value of houses to £410,000 and estate agents were wildly overvaluing.
Assuming that the houses built would have sold at the aritifically high price supported by the States of Jersey then the sale has made the developer a profit of just £420,000 over what he could realistically have achieved by completing the development.
£4.20 each is I believe a small price to pay for the enjoyment in perpetuity of this headland. This headland is now in safe hands and no future bankrupt government will be selling it off cheap to fund civil service pension shortfalls which is what will happen with most public assets in the not too distant future without a change of government.
On balance I am content with this decision.The rate of return on this investment for Mr Hemmings is just 5% per annum, had he just bought gold and left it sitting there he could have achieved a return of 13.5% per year. Let no one get confused this was a REALLY poor investment decision. We have bailed him out.