If you are covering reports that Michael Gove will warn developers to agree a £4bn cladding plan, please see the following comment from Oli Creasey, head of property research at Quilter Cheviot:
“Following leaks on Friday and over the weekend, Michael Gove is set to unveil a plan this afternoon asking property developers to contribute a further £4bn to the cost of cladding removal in the wake of the Grenfell fire in 2017.
“Progress on this issue is extremely welcome. Far too many leaseholders remain trapped in flats that are potentially unsafe and which they are unable to sell or borrow against. There will be little public sympathy for housebuilders, which have made exceptional profits during the pandemic and will be unable to push responsibility back on the government.
“Property developers are already expected to pay a 4% residential property developer tax from 2023 onwards, which will aim to raise around £2bn over the next decade to cover the cost of re-cladding buildings over 18 metres tall. Gove’s new policy is aimed at remedying problems in lower rise buildings between 11 and 18 metres high.
“This could either be in the same form as the RPDT, which would be a further 8% tax on top of the existing bill, taking the total tax bill to around 37%, or it could be a one-off hit equating to around 10% of the house building industry’s current market cap.
“Despite the government admitting some fault in the run up to the events of 2017, they will not be contributing any further funds to the work required and all costs unaccounted for will be covered by industry. It is understood at this stage that the £4bn cost will be put to the house building sector as a ‘voluntary’ expense, so it remains to be seen how effective this will be.
“A number of house builders have made provisions to cover such costs, for example Persimmon and Taylor Wimpey have provisions of £75m and £125m respectively for these lower-rise buildings, but their willingness to pay a substantially higher amount on a voluntary basis is probably very low. We would expect this to evolve into a more enforceable tax or similar in due course.
“Publicly traded house builders are not the only companies on the hook. They represent around 40% of the residential development market, with the remainder being built by privately help businesses, large and small. The indication is that large private businesses will be held accountable, although smaller businesses may slip through the net. The other players are the material manufacturers, who have so far not been discussed as on the hook for these additional costs. If existing provisions or other sectors are in scope the impact on the housebuilders could reduce substantially.
“There may also be unintended consequences for the government’s own housebuilding targets, should the higher tax reduce the output of housebuilders, particularly at lower margin sites. All else being equal, this could put further upward pressure on property price. However, the government will no doubt consider this a price worth paying.
“Ultimately, we expect this additional cost to stay with the housebuilders, though the government may need to enforce contributions rather than ask for volunteers. However, the entire £4bn cost should be spread across private and public companies, and we would expect the publicly-traded companies to cover around half of this sum between them. The sector is down c. 5% year-to-date, which is a broadly fair response.”
