7 April 2022
Following news that Bellway has signed up to the voluntary pledge with the Department for Levelling Up, Housing and Communities in relation to historical fire safety issues on buildings, please find below a comment from Oli Creasey, property research analyst at Quilter Cheviot:
“This week a number of UK housebuilders have signed up to the Government’s Building Safety Programme. With high-rise buildings (those over 18m tall) already covered by a new tax on developer profit, the Programme aims to encourage builders to go back and pay for mediation work on properties between 11-18m tall which they had built.
“While there was initial pushback from the building sector, we have seen most companies now agree to cover these costs, likely putting further pressure on the remainder of the sector, which faces the risk of severe planning restrictions if they don’t comply.
“The impact on companies is not symmetrical. The larger builders, whose focus has been on building houses rather than apartment blocks for some time now, face limited consequences; Taylor Wimpey’s £80m additional provision is equal to <10% of last year’s EBIT, while Persimmon management state that already-disclosed estimates cover these additional costs. However, Redrow and Bellway have made more significant new provisions – equal to c. 50-60% of last year’s EBIT, and Crest Nicholson’s £80-120m provision will likely account for almost all of last year’s profit – unsurprising given the relatively small company has a large number of flats in its legacy book.
“Two questions now remain: Firstly, how will the government handle so-called “orphan” assets, where the developer has ceased trading or is otherwise unidentified? Our suspicion at this point is that housebuilders may yet be asked to dip into their pockets once again, particularly given how quickly the new housing minister has been able to get them on the hook for their own properties, and the cash reserves (from historic profits) held by most of the sector. There was some suggestion that material manufacturers and others in the supply chain may get caught in this net, but that has gone quiet again.
“The second question is how shares in housebuilding firms react? The severity of the declines year-to-date (-20% or more for most of the sector) more than account for the costs announced so far, but our concerns are that the companies are not yet through the storm. Further demands for mediation work may yet appear, and we are cautious on the outlook for house prices – where the cost of living and interest rate increases on mortgages will push affordability, and the end of Help to Buy in 2023 may also take money out of the sector. It is worth noting that builders are highly exposed to house prices. Taking Bellway as an example, if house prices fell c. 10%, the company’s EBIT would approximately halve. Food for thought for any investor.”
