Iwona Hovenko, real estate analyst at Bloomberg Intelligence, described the costs as “excessive” and said they were “likely to curb UK homebuilding”.
Developers are subject to a four per cent residential property developer tax (RPDT) which is expected to raise £2bn and a further £3bn and will be paid towards the Building Safety Levy. Builders have also set aside around £2.1bn to remediate the homes they have built.
Hovenko said: “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.”
A significant contribution
Hovenko said the top five UK homebuilders would have to pay around 60 to 80 per cent of the £200m annual tax revenue from the 10-year RPDT surcharge.
She added: “That’s based on our analysis using pre-pandemic fiscal 2019 pre-tax profit, as well as consensus for 2023 – when profitability is predicted to fall steeply versus 2022 due to the housing market slowdown.”
Hovenko said the contribution would be 80 per cent in a normal housing market environment but this year was expected to be 60 per cent of the tax.
Based on Bloomberg Intelligence’s analysis, Hovenko said the levies could directly hit the incomes and dividends of builders.
She said: “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.”
Hovenko said the largest homebuilders were not solely responsible for fixing the building safety issue, despite having more capacity to weather the costs.
She added: “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 recognises 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.”
Other considerations
Hovenko said the costs placed on leaseholders, such as waking watch fees and higher insurance, had made homes unsellable and risked clogging the market.
While unsafe cladding has been the primary focus when it comes to policy, Hovenko said there were other fire safety issues which were areas of concern.
She said problems with flammable insulation, balconies and faulty or missing fire barriers had been brought to the fore.
“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,” Hovenko added.
