On 10th January 2022, Michael Gove – acting as the Secretary of State for Levelling Up, Housing and Communities – announced that the UK government must reach a ‘new deal with industry’ by March 2022 in how to solve the cladding ‘crisis.’ If developers do not put forward a fully-funded plan, estimated to require 4 billion GBP, the government will seek legal ways to force a resolution. In the wake of the announcement, shares in the FTSE 350 Construction & Building Materials index are down 7% on the 31st January 2022 from a peak on the 4th of that month, although this coincides with cooling house sales.
After the Grenfell tragedy, which led to at least 74 deaths, it was realised that hundreds of thousands of flats in the UK were covered in a type of cladding made from aluminium composite material with a highly flammable polyethene or polyurethane core. This cladding means fire can quickly spread up around the outside of the building. This has since been outlawed on buildings over 18 metres in height. Properties with the cladding were obliged to remove it, however, there has been controversy over who should pay: developers, cladding manufacturers, leaseholders, or the government. For buildings over 18 metres the government has already committed 5 billion GBP, including 2 billion GBP from a new residential construction tax.
In January 2020, the government advised that buildings between 11 and 18 metres should also be assessed for fire safety. These were not covered by the original funding. Thousands of new leaseholders, that is people who own their flat on very long-term lease from the freeholder of the building, had to pay for cladding to be removed themselves if their building was assessed to be a fire risk. The UK government estimated the cost to remove the cladding to be over 9,000 GBP per household affected, but a poll by Inside Housing of affected leaseholders found the figure to be between 30,000 GBP and 50,000 GBP when including other required fire proofing renovations. On top of this, until the cladding is removed leaseholders face fire safety assessment costs, higher insurance costs, difficulty selling their flats (mortgage providers do not lend to flats considered a fire risk), and potentially paying for a 24-hour fire watch. Together these financial strains could bring many households to bankruptcy, the Inside Housing poll found 17.2% were exploring bankruptcy options.
Financial institutions also are exposed to risk. In November 2021 the Prudential Regulation Authority of the Bank of England stated that they were worried if households had to face the costs from cladding, which appear to be higher than the government expected, there may be a wave of defaults on mortgages. It recommended audits of lenders such as Lloyds and Nationwide to investigate out how much capital could be at risk.
The new government policy – a U-turn from the previous promise leaseholders would pay no more than 50 GBP per month – attempts to protect leaseholders in smaller buildings, where the necessary repairs are not currently funded. The government itself, however, has not committed any new money. Instead, they hope funding is to come from an agreement with firms, specifically ‘housebuilders and developer trade bodies’ with profits over 10 million GBP, although other firms will also be consulted later. Michael Gove has stated that if firms do not come to an agreement, legal measures will be taken against them – such as restricting their ability to do business in the UK, removing access to government schemes, or threatening the industry with further taxation.
Getting developers to agree to pay is unlikely to be easy. Mathew Pratt, Redrow plc Chief Executive, whose company lost 13% of its share price in January 2022, accused the government of going after an ‘easy target.’ The Financial Times reported another CEO saying the plan would ‘end up in the courts.’ Sue Ryan, a partner at Gowling WLG, echoed this concern, stating that in developers the government has targeted for buildings taller than 18 metres, ‘their insurers are fighting everything tooth and nail.’
Representatives of affected leaseholders have written to Norges Bank Investment Management (NBIM) which they hope could threaten to withdraw funds if firms will not pay for repairs. NBIM has not commented on the open letter. Pressure groups have successfully got the Mercedes-AMG Petronas Formula One team to revoke a sponsorship deal from cladding manufacturer Kingspan Group.
If funding is secured, it would mark a practicable way to remove the flammable cladding, approximately 4 years after the horrors of the Grenfell Tower fire. However, the implementation of such funding will prolong an ultimate solution for years to come. The government admits this policy is not a total solution to the crisis for the 1,700 unsafely clad apartment buildings across the UK.
Analyst: James Miller
Sector Head: Charlotte Snell