Reports that the cost of replacing unsafe cladding may be billions of pounds less than expected is positive news for housebuilders, Liberum Capital declared.
A news story over the weekend in the Telegraph citing sources close to business consulting firm PwC suggested that the cost to remove cladding from sections of buildings between 11 and 18 metres (m) may come to less than £1bn, which is far less than the government’s first stab at the cost, which was £4bn.
Buildings over 18m high are already covered by a £3bn contribution from the government and a £2bn contribution from a tax surcharge on the listed housebuilders (4% from April 2022). In response to the outcry over occupants of flats in a low-rise building bearing the brunt of the cost of replacing the cladding (or essentially making their property unsellable), the government intervened and suggested the housebuilding industry should pay its fair share.
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The replacement of the cladding became a major political issue after the Grenfell Tower tragedy. More than 70 people died in the fire in the high-rise block in London in 2017, sparking a widespread inquiry into the cladding in place on the outside of the building and its use in other tower blocks.
The PwC report also indicated that the listed housebuilders would not be alone in being expected to chip in to pay for the replacement, with private companies and the government also expected to contribute – the latter because of regulatory failings that allowed housebuilders to cut corners and put profits ahead of safety.
“The UK housebuilders face a challenging 2022 as consumers come under pressure from rising costs but would benefit from a rapid and milder than expected solution to cladding,” the broker opined.
Despite a roaring housing market and a government that has consistently bent over backwards to keep house prices ticking up, shares in housebuilders have been under a cloud since the government changed its stance on lower-rise buildings.
Liberum believes that the sector may take a while to perk up again with investors inclined to wait until they have a better understanding of the macro-economic impact of rising costs on consumers’ finances and appetite for home buying.
“2022 has started very well and housebuilders are likely to be ahead of where they need to be to hit 2022 consensus earnings,” the broker added.