MortgagesNov 1 2021

Govt reserves for cladding removal ‘nowhere near’ enough

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Govt reserves for cladding removal ‘nowhere near’ enough
UK Parliament/Jessica Taylor/Handout via REUTERS Chancellor Rishi Sunak laying out his Budget in Parliament

Whilst Sunak largely recycled figures from old housing announcements in last week's (October 27) Budget, including the government’s £5bn cladding-focused package from February, he also shed light on a 4 per cent property developer tax to tackle the cladding crisis.

The ‘Residential Property Developer Tax’ is set to raise £2bn, but remains part of the £5bn fund the government has already announced. It will apply to firms earning more than £25m a year from next year.

Lee Nuttall, head of tax at law firm Gowling WLG, said 4 per cent was “on the high side” of the range of expected outcomes, but “not a surprise” given a pre-announced threshold for who will actually be liable to pay the tax.

Nuttall added the £25m 'allowance' before the new tax bites “will be seen by many as a generous move”.

But for those 2m or more leaseholders stuck in unmortgageable homes due to cladding woes, listening to Sunak’s Budget yesterday would have brought them little hope.

Jeremy Leaf, a former RICS residential chairman, said the unchanged £5bn fund was “nowhere near the sums mentioned [by the industry] as being realistic to resolve the problem” leading up to the Budget.

As feared, the government has now confirmed its intention to point the finger at a select group of developers [...] and then tiptoe away from the cladding scandal.--Jeremy Raj

Since February, campaigners such as Polluter Pays have estimated a bill closer to anywhere upwards of £10bn, arguing even with a developer tax, leaseholders will be left to pay the remaining £8bn.

Leaf continued: “A proper assessment of what’s involved is required, as well as enough tools to do the job in terms of engineers and surveyors and robust checking. 

“Why should anyone be stuck in something un-mortgageable, particularly those blocks with very limited amounts of cladding? They have been tarred with the same brush as those blocks with extensive issues.”

Govt ‘point the finger’

Some have accused the 4 per cent property developer tax of being nothing more than a government smoke screen to the real problems at hand.

Jeremy Raj, national head of residential property at law firm Irwin Mitchell, said: “As feared, the government has now confirmed its intention to point the finger at a select group of developers, tax them - in a way that doesn’t address the issue or change behaviours - and then tiptoe away from the cladding scandal.”

Raj called on “all interested parties” to work together to ensure that “the heat isn’t turned down” in respect of making funds available for remedial work, as well as improving the regulatory, planning and building regulations framework.

In his autumn Budget, Sunak also promised an additional £65m investment to improve the planning regime, “through a new digital system” which he said would ensure “more certainty and better outcomes for the environment, growth and quality of design”.

The investment in the UK’s planning scheme is also intended to help remedy the country’s supply crisis, which has helped to buoy house prices over the last year by around 10 per cent.

Impact on supply

But Phil Kinzett-Evans, partner at accounting firm UHY Hacker Young, argued a developer levy would only worsen the supply crisis faced by UK homebuyers today.

“From April 2022, this new tax imposes further costs on an industry that already has to deal with multiple targeted taxes like Section 106 and the Community Infrastructure Levy,” he explained.

“When property developers are already facing rising raw material costs, a skills shortage driving up wages and spiralling energy prices, introducing another tax is going to be a tough pill to swallow.”

Kinzett-Evans is concerned the levy will scupper the government’s affordable housing scheme, which it has put £11bn aside for.

“It could well trigger more developers to look to higher-margin markets like prime residential property. It remains to be seen what impact this will have on government targets to meet affordable housing demand.”

Potential solution

In August, FTAdviser learnt the government is currently looking at an amendment to its recent Building Safety Bill which campaigners say could “unlock” leaseholders in buildings with unsafe cladding.

Campaigners led by Woolwich leaseholder Steve Day created the amendment, which would place the responsibility of remediation costs on those who failed to make the grade in construction standards - rather than on leaseholders.

Called the ‘Polluter Pays Bill’, the scheme would work alongside the government’s grant schemes which are backed by £5.1bn in public funding remediation.

This money would be used to foot the initial bill. But over time, building companies would pay the government back based on the Building Safety Fund - a document which sets out how to calculate which parties are responsible for unsafe cladding and to what degree.

Until a clear pathway to funding all the cladding remediation is found, lenders remain cautious to lend on buildings with potential cladding issues.

But as Kinzett-Evans highlighted, placing all the heat on developers could only worsen the supply crisis, which is only continuing to push property prices up, fencing more and more buyers out of the market.

ruby.hinchliffe@ft.com