Housebuilders hit by cladding crisis u-turn

Michael Gove got tough on housebuilders this week and turned Government policy on its head taking aim at builders making big bucks and with big balance sheets to make buildings safe. The tough message on big builders certainly garnered support from leaseholders and the media and demolished housebuilders share prices in its wake. However, whilst it is right to take the penalty away from the leaseholders, is it right that builders should pay the bills for homes they did not build? Being tough may have done Mr Gove's leadership aspirations no harm, but his rhetoric may have also swung the cladding pendulum too far.

Cladding crisis u-turn

This week Michael Gove, the Secretary of State for the Department for Levelling Up, Housing and Communities (DLUHC) said that:

Leaseholders living in their own flats will not face any costs to fix dangerous cladding, with developers and cladding companies paying instead

The housing industry will be given two months to agree to a plan of action to fund remediation costs, currently estimated at £4 billion

There will be new measures to hold firms to account and restore common sense to the market.

Not a penny more, not a penny less

The DLUCH this week guaranteed that no leaseholder living in their own flat will have to pay a penny to fix unsafe cladding. This is great news for all those affected by the cladding crisis and seems to us the only right thing to do. Homeowners purchased their homes in good faith and should not be responsible for rectifying the shortcomings of others.

Cladding cliff edge

The DLUCH have given the housing industry two months to agree on financial contributions to a scheme to fund all of the necessary work, otherwise, if necessary, the Government will impose a solution in law.

Those at fault to foot the bill

The Government has said that those at fault will be held properly to account: and is setting up a new team is to pursue and expose companies at fault, making them fix the buildings they built and face commercial consequences if they refuse.

What does the cladding crisis mean for the UK housebuilders?

The large UK housebuilders saw millions of pounds wiped off their market capitalisation as their share prices tumbled in the wake of Mr Gove’s statement on Monday.

However, the overwhelming majority of homes built in the UK by the listed housebuilders are traditional two to three-story homes using traditional bricks and tiles. Relatively few of the homes they build are low- or high-rise apartment blocks where more modern types of cladding are used.

All the major housebuilders we follow have completed detailed reviews of their current and previous developments to assess their exposure to the cladding in question. Following the review, all have made specific financial provisions (set aside the cash) to pay for all the repair and remediation work required to rectify the cladding and fire safety issues. Those that haven’t made specific provisions have commented that the costs of replacing the cladding will be covered by their existing provisions and cash flows.

In addition to these specific provisions, UK housebuilders with annual profits of £25m or more will have their profits taxed at an additional 4% (on top of corporation tax) to contribute to footing the wider bill. This additional tax will remain in place until all the cladding issues have been resolved. The new tax will be levied from April 2022.

Paying for the sins of others?

The housebuilders provisions and the 4% ‘cladding tax’ are not news, but what spooked investors, in our view, was Michael Gove’s comments that “those with the big bucks and the big balance sheets should pay to make buildings safe”

Many would suggest that the big listed housebuilders such as Barratt, Persimmon and Taylor Wimpey are builders with big bucks and big balance sheets.

There are concerns in the investor community that the housebuilders will have to pay for the mistakes of others and this seems to us as unfair as asking the leaseholders to pay for the rectification works.

We would suggest that all housebuilders and developers should foot the bill for rectifying the issues on the homes they have built but not those built by others.

A clearer cladding path is needed - Who made the cladding decisions?

Before pointing the finger firmly and clearly at the housebuilders, we need to take a step back and consider the bigger picture.

In our view, the liability should not necessarily just sit with the housebuilders. We need to look at the whole supply chain:

Was the cladding knowingly manufactured outside the scope of the rules?

Were the rules and building specifications themselves to blame rather than the suppliers and developers? Were the fire risks, at the time, an unknown-unknown? (Was it a case of buying a diesel car because it was thought to be the right thing to do?)

Where there was a choice in what cladding to use, why was one form of cladding chosen over another?

Was the cladding used in ways it was designed to be used? If the homebuilders did not follow the manufacturer's installation instructions the manufacturer's liability may be lessened.

What have the large housebuilders done about cladding already?

We summarise below the response to the cladding crisis from some of the UK's largest housebuilders:

Barratt Developments

All of Barratt’s buildings, including the cladding and complete external wall systems used, were signed off by approved inspectors as compliant with the relevant Building Regulations at the time of their construction. In the aftermath of the tragedy at the Grenfell Tower, Barratt acted to remove and replace ACM cladding from the small number of legacy developments where this material had been installed.

In aggregate, from 1 July 2017 to date, Barratt has incurred charges of £184.2m across its Citiscape and external wall systems and associated reviews. Of this, £81.5m was charged to adjusted items during FY202 and it has outstanding provisions of £67.6m.

Bellway

Bellway continues to take a proactive and responsible approach to concerns about fire safety in high-rise buildings across the UK. Bellway recognises its responsibilities in its legacy apartment portfolio and continues to review combustion risks, in external wall systems, on past high-rise developments. The Group continues to work with building owners and warranty providers, who are undertaking their own investigative works, to determine whether the combination of materials used in the construction of whole wall systems adequately prevents the spread of fire.

During FY2021 Bellway have set aside an additional net amount, of £51.8 million to continue supporting residents of affected buildings. The additional costs relate to developments where initial investigative works had not been previously concluded. In addition, they are associated with a widening scope of works on certain, more complex sites, with these being required to achieve an acceptable remediation strategy. In addition to their provisions and approach to legacy building safety issues, Bellway has also participated in the Government’s consultation on establishing the RPDT to raise revenue for the Government’s Building Safety Fund.

Bellway has provided £164.7m for building safety improvements since 2017.

Berkeley

As at 31 October, Berkeley Group had provisions of £128.7m set aside for ‘post-completion development obligations’. At one point Berkeley had a team of 50 people working full time looking at each of their developments to establish the fire safety risks and the work required to rectify the safety risks uncovered.

Persimmon

Last year Persimmon identified 26 buildings that may be affected by the cladding issue. Nine of these were high-rise buildings over 18m high and 17 buildings below 18m high. The Group made a provision of £75m in its FY2020 accounts to pay for any necessary work which might be required on these buildings relating to cladding.

Redrow

Redrow identified 10 schemes as potentially not conforming to the current government regulations. Each development is unique and was designed following the building regulations and accepted practices at the time. Where there is an obligation to do so, Redrow is fully committed to working with their contractors, leaseholders and management companies to address any issues on these schemes where required. Management has estimated the cost of remedial works but it is inherently uncertain whilst investigations and assessments are ongoing. It is not anticipated that any reasonable changes would have a material impact on operating profit in the period.

Redrow’s provisions for remedial works were £33m as at 30 June 2021.

Taylor Wimpey

In March 2021 Taylor Wimpey set aside £125m for cladding and fire safety repairs after it had identified around 230 buildings that may be affected by the cladding issue. The £125m was in addition to £40m it has already allocated to remove the ACM Grenfell-type cladding from 19 buildings it had built.

Taylor Wimpey said that the provision would cover any residential block it had built in the past 20 years.