Iwona Hovenko, Real Estate Analyst at Bloomberg Intelligence, says the UK’s largest homebuilders will be impacted disproportionately by new taxes to fix safety issues in apartment buildings following the Grenfell Tower tragedy.
Large UK homebuilders (Persimmon, Barratt, Taylor Wimpey, Bellway and Berkeley) are likely to be disproportionately hit by hefty taxes (80% of the industry levy) for fixing apartment-building safety issues, on top of costs to fix their own legacy projects. Dents to profit and capital returns are likely to ensue, just as the housing market decelerates.
Multiple levies on UK homebuilders to fix fire-safety issues in tall residential buildings, including a 4% Residential Property Developer Tax (RPDT) aimed at raising £2 billion and a further £3 billion Building Safety Levy, seem excessive and are likely to curb UK homebuilding. This comes as developers already recorded hefty provisions for remediating the homes they’ve built, with the seven largest UK homebuilders setting aside £2.1 billion, with their pledges soon to become legally binding.
Developers fixing their own buildings may seem justified, yet paying the other two large levies to fix “orphaned” buildings (where builders can’t be held accountable) looks punitive to us. The local nature of homebuilding nevertheless enables the government to force these measures on UK developers.
Big-Five Homebuilders to Pay 60-80% of Residential-Developer Tax
The top-five UK homebuilders may have to pay as much as 60-80% of the total annual £200 million tax revenue (as the government projects) from the 10-year 4% RPDT surcharge introduced in April. That’s based on our analysis using pre-pandemic fiscal 2019 pre tax profit, as well as consensus for2023 (when profitability is predicted to fall steeply vs. 2022 due to the housing-market slowdown).The top-five developers could pay 60% of the £200 million revenue tax in 2023 from the levy assumed by the government (which is unlikely to be met, due to a lackluster housing sector), yet in amore “normal” environment, their contribution would probably be closer to 80%.
Dividends Could Be Curbed by New Levies
Newly proposed developer levies to cover the costs of fixing unsafe cladding could directly hit homebuilders’ net income, EPS and dividends, based on our analysis. The new charges on companies active in residential development include a £2 billion contribution funded via a 4% 10-year developer tariff as announced in the October 2021 budget, as well as additional £5 billion charges. The latter comprise developer contributions to fix faults in tall buildings they’ve built in the past 30 years, as well as the Building Safety Levy. The higher tax burden may also limit scope for shareholder returns, especially when combined with more-muted housing activity. That said, companies such as Barratt and Bellway are both increasing their dividend-payout policies (lowering divided cover) to partly compensate for these effects.
The largest homebuilders may have the “broadest shoulders” to foot the multi-billion-pound cladding-removal bill, yet they probably aren’t solely culpable for fixing the problem.
Who’ll Pick Up the Tab?
The largest homebuilders may have the “broadest shoulders” to foot the multi-billion-pound cladding-removal bill, yet they probably aren’t solely culpable for fixing the problem. Indeed, some companies have little exposure to high-rise buildings, even if they’re accountable for other fire-safety failures such as faulty fire barriers. Rightly, we believe, the smallest developers — which may have never built apartment buildings — may avoid extra costs. Yet even as the government recognizes contractor, designer, architect and other parties’ responsibility, it’s the homebuilders who face most of the costs, on top of remedial works to their own projects. The raid on homebuilders for funding fixes also brushes over the potential liability of building-materials makers who may have failed to disclose product fire-safety hazards.
Fire-Safety Faults Hike Owners’ Costs, Clog Market
The key safety-hazard risk if a fire breaks out in a high-rise apartment block is the potential loss of residents’ life, but most home owners (28.7%) also face cladding-fix costs of 30,000-50,000 pounds. Indeed, 34% are required to settle bills of 50,000 pounds-plus, including 15.4% above 100,000pounds, based on Inside Housing’s survey. Yet 59.5% of them have modest total household incomes of less than 50,000 pounds a year, with 79.1% bringing in less than 70,000. Buyers eligible for shared ownership due to low incomes, also face the full remedial-works cost. The need for fire-safety certification or remediation plan has made many apartments unsellable, while owners face punishing costs until issues are fixed, such as “waking watch” fees (24/7 fire wardens) and steep insurance hikes of 100-250 pounds a month per property.
Cladding Removal Is Tip of Fire-Safety Iceberg
Unsafe cladding has got most attention, yet London’s Grenfell Tower tragedy has also brought to the fore the other fire hazards of tall residential buildings, including flammable insulation, balconies and faulty or missing fire barriers. Construction-capacity bottlenecks, build-cost inflation and any disputes about the coverage of repair bills may slow the speed of remediation, with owners potentially stuck with problematic — or even unsellable — apartments. The appointment of a national building-safety regulator and tighter building regulations may help ensure this doesn’t happen again. Based on government data, there were 691,000 apartments in buildings taller than 18 meters in2020, and 1.6 million dwellings in residential blocks of 11-18 meters high in England.