In this week's blog, it would be remiss not to mention the Development Remediation Contract deal that has finally been drawn up between some of the UK's largest homebuilders and the Department for Levelling Up, Housing and Communities (DLUHC). This ensures the cladding problems uncovered post-Grenfell will finally be addressed, and the homeowners involved can finally get some resolution. Persimmon, Taylor Wimpey, Crest Nicholson, Redrow and Bellway have all signed to commit to fixing the buildings they are responsible for constructing and have also committed to reporting their regular progress to the Government.
This deal was mediated through the Home Builders Association, and it's being framed as self-remediation; however, it's ultimately taken the Government implying they will block these businesses from ever starting new development projects in the UK again to solicit the billions of pounds of generosity required to rectify the dangerous buildings they unwittingly sold to the unsuspecting public. So although a victory, not one that shines a positive light on UK Homebuilding, albeit one that shines a light on the necessity of leverage in a negotiation.
It may also be some cold comfit to national level pressure groups such as the 'Manchester Claditators', a group of heroic campaigners that made local and national news campaigning on behalf of the people trapped in dangerous & mortgaged developments now valued at £0. The Manchester Cladiators is a voluntary group representing the residents of buildings across Greater Manchester with dangerous cladding systems and serious internal fire safety issues. In May 2020, they gave evidence to the Housing Communities and Local Government Select Committee Inquiry, and not only does this contract not meet the well-reasoned demands from the group, but it also has a worrying "as soon as reasonably practicable" caveat in it, which a cynical commentator could suggest means a time interminable to the people desperate for answers.
This backdated approach has been the hard yards for the Government; the forward-facing strategy was implemented last year with the introduction of the residential property developer tax (RPDT), a 4% tax on profits exceeding £25 million, a strategy designed to create a pot of money to work with leaseholders to rectify these issues. However, that strategy has resulted in a widespread debate in the home building industry, some point at developers with offshore tax structures avoiding their dues, and some argue they are being financially penalised for the sins of others. Yet, there is no obvious way to do this other than to have a blanket policy.
As it stands, the burden is sat on the broadest shoulders, so SME developers operating and borrowing in the alternative finance market aren't yet involved; however, the Government has announced it will consider pursuing smaller developers to pay for cladding and fire safety defects after its focus on more significant players has concluded, that could be in both a backdated way with businesses specifically involved, and a forward direction on additional levies and tax, and that will have a direct impact across the grassroots market. However, due to the nature and structure of SME Development businesses, the likelihood of the backdated approach being successful is almost nil; at Invest & Fund, we often help clients structure the cashflow element of moving from one scheme to the next and the margins often equate to the kickstarting of the next project, so the logical approach would be to adjust the banding on the RPDT to take a smaller slice of a smaller margin. Still, at this time, nothing has been announced.
What does that look like for our SME developer clients? At this point, we are at speculation, so it's important to consider that this may not happen, at least not in any significant way. An ongoing Building Safety Fund is an essential consideration, even if it's an additional cost across the industry. Still, the Government should consider hedging these additional costs with some financial incentive for smaller developers to find the balance between the sector's growth and the consumer's safety.
There will come the point where housing production needs to be significantly accelerated, and lenders and smaller developers will be called upon to underpin that. After Grenfell, there can never be a situation where safety is too expensive.
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