How Effective Is the Government’s Approach of Imposing A Cladding Tax?

Summary

• The British government announced new taxes on house builders to finance the remediation programme with respect to unsafe cladding on the high-rise buildings.
• British housing secretary Robert Jenrick came out with a blueprint to remove unsafe cladding from high-rises and introduced a new tax regime for developers.
• Leading housebuilders are setting aside millions for cladding remediation work.

In a bid to make high-rise buildings safer, the British housing secretary announced a £3.5-billion plan to replace combustible cladding that can be dangerous for all buildings taller than 18 meters. The British government will provide reassurance and safety to the leaseholders and pay for the removal of unsafe cladding.

The British government came into action after a fire broke out in the multi-storey Grenfell Tower in West London and the cladding on the building led the fire spread in 2017 killing 70 people.

The government, which is already sitting high on a debt pile, has decided to raise funds from the developers in the form of taxes. The residential property development sector, which has been doing well in the recent times due to unprecedented demand for new homes amid stamp duty holiday and lifestyle changes caused by the pandemic, is likely to take the hit by the new taxation scheme announced by the British government.  

Also read: Housebuilders Barratt, Persimmon Report Strong Sales Aided by Stamp Duty Holiday

The UK government is expected to raise at least £2 billion in form of taxes from developers in a decade that will help it in finance the remediation programmes for the high-rises. This move shall help in restoring the confidence of consumer across the housing sector and will also ensure fair contribution to the remediation programme.  

Provisions for cladding remediation work

Footsie-listed house-building company Persimmon Plc (LON: PSN) has provisioned £75 million to pay from the remediation programme on its previously developed projects. The residential home developer has identified more than 25 projects that might require remediation with respect to unsafe cladding.

Another FTSE 100-listed house-builder Barratt Developments (LON: BDEV) was hit by cladding costs despite recording good sales. During the first half of the 2020 that ended in December, the revenue was up by 10 per cent. However, the profits were only marginally higher as £63.4 million was set aside as provision for cladding remediation work at its Croydon based projects during the first half of 2020. Notably, the company resumed dividend payments and proposed an interim dividend of 7.5 pence per share.

The housebuilders are making provisions for cladding remediation work, which will certainly help in restoring the confidence of consumers.