Safety spend puts pressure on new build development plans

Given that each new affordable home in London requires investment of around £100,000, Network said this would reduce the leading landlords’ financial capacity by the equivalent of 43,000 homes.

 

The note continued: “The uncertainty in relation to very large bills is already impacting on housing association investment plans and will inevitably lead to fewer affordable homes being built – unless government investment is forthcoming soon. The large potential range in costs increases caution of boards in making investment decisions in order to protect the financial health of organisations.”

 

One area that remains a problem for housing associations is government guidance on remedial works. In January, the government made a series of announcements in an effort to clarify guidance on what fire remediation work should take place on tall buildings. It proposed that the threshold for retrofitting sprinklers be reduced from 18m to 11m, with a similar reduction proposed for a ban on combustible materials in external walls.

 

It also published a call for evidence on how to assess risk in existing buildings, with the potential for a new risk matrix that moves away from an emphasis on height alone. The consultation on this closed in February.

 

Although Network would not be drawn on whether it would reduce its own development programme, its chief executive Helen Evans – who also chairs the G15 – said that the ongoing uncertainty meant the association’s board was proceeding “with prudence”.

 

She told Social Housing: “There is a nationwide problem of building safety and considerable confusion. In the face of this uncertainty our board is clear that we should proceed with prudence, while still doing as much as we can to stay in touch with our ambitions to build as many new affordable homes as possible to help future residents.”

L&Q has previously told Social Housing that its forecast 2019/20 surplus is £50m below budget because of a “conscious decision” to invest in health and safety and the quality of its homes more generally – leading to a £70m spike in its maintenance spend – along with pressure on its sales activity.

 

Another G15 member – A2Dominion – has 143 buildings at 18m or taller and a further 350 buildings at 11m or taller. The landlord has already accepted that the cost of making these buildings safe has impacted it financially.

 

It has set aside £13.5m across a three-year programme “to respond to issues with fire breaks and rendered external wall insulation across a number of buildings”.

 

The 38,000-home landlord saw a £15.5m reduction in its surplus between 2017/18 and 2018/19 as “a direct result of the investment set aside for the fire safety works required to… tall buildings”.

 

Andrew Evans, executive director (operations) at A2Dominion, said: “We are currently in the middle of our business planning cycle. As part of this, we are assessing our position on fire safety and expect to gain more clarity on the associated costs and implications. We are also reviewing the Ministry of Housing, Communities and Local Government’s revised guidance on fire safety to ensure our plans are fully aligned.”

 

Other landlords are also assessing the potential cost associated with the government’s new guidance, alongside the move to zero carbon.

Hyde Group has spent £70m on fire prevention work since 2017, focusing on its 86 buildings over 18m tall and a further 80 it identified as “at risk” based on occupancy or structure. The 50,000-home landlord also launched a “safer homes agenda”, which involves an audit of all its other buildings from a safety point of view.

 

Neal Ackcral, chief property officer at Hyde, added: “Within our new asset management strategy, we have indicated our commitment to the decarbonisation programme and we are currently reviewing both the scale and approximate cost of these works to meet government’s 2050 agenda. Once complete, we will review the cost of energy improvements and estimated fire programme and development costs, in order to implement a strategy that will enable us to meet our corporate objectives.

 

“We recognise that the costs within these three areas will be significant and will present us, along with other landlords, an unprecedented challenge that we will need to respond to.”

 

Clarion, which has 80 buildings over 18m in its portfolio, told Social Housing that it has spent £40m over two years on fire safety measures, with another £20m budgeted for the next financial year. However, in a statement, it added that – while it has kept its programme “under review” – the “fire safety programme does not impact our commitment to building new homes and communities”.

 

However, another national provider – The Guinness Partnership – is reducing its build plans by 40 per cent.

 

“There are many different elements to the building safety works, which range from cladding removal and replacement, to investment in sprinklers, to an ongoing fire door programme. All of this investment is to ensure that we respond appropriately to government advice notes”

 

A recent credit rating for Guinness from Standard & Poor’s (S&P) had cited a significantly reduced development plan for the North West and London-based provider, from a previous plan to develop 20,000 homes over 10 years to a new aim to complete around 6,000 during the period. However, this has since been corrected by S&P to say the actual revision is to between 12,000 and 13,000 homes.

 

Phil Day, group finance director at Guinness, said that the group board has been considering development aspirations in the context of market conditions, sales and the increasing level of investment in existing homes, in respect to building safety requirements and decarbonisation.

 

He said that the group is set to reduce the proportion of homes for sale in the 7,500-home pipeline to 2023, which had previously been set out as a third. It is also likely to move from a 10,000-home programme to a 6,000 to 7,000-home plan between 2025 and 2030.

 

Mr Day said there is an increased forecast investment in existing homes over the next five years, reflecting the timing of component replacements, increased spend on building safety works, sustainability and efforts to move to Energy Performance Certificate C by 2030.

 

“There are many different elements to the building safety works, which range from cladding removal and replacement, to investment in sprinklers, to an ongoing fire door programme. All of this investment is to ensure that we respond appropriately to government advice notes.”

 

Asked whether more providers will need to scale back their development targets, Mr Day said: “Yes, I think it is inevitable and we’ve seen quite a lot of it already. It will obviously depend on the stock profile of individual housing providers and how aspirational their development programmes were but I do think boards across the country will be having these types of discussions at the moment.”

 

“If you layer both on top of a business plan then it’s got to mean either you spend less on something else, such as development, or you could borrow more money”

 

Richard Petty, lead director at JLL’s Living Advisory, said that the combination of fire remediation work and the government’s commitment to zero carbon by 2050 is likely to impact the development ambitions of a number of landlords.

 

“At the headline level, you have two enormous problems: fire safety and the move towards net zero carbon,” he explained. “If you layer both on top of a business plan then it’s got to mean either you spend less on something else, such as development, or you could borrow more money.

 

“Taking on more debt means more risk but there’s capacity for doing that in many organisations. If you can do that without jeopardising the business then it’s about accepting that trade-off. Overall, it might be a net reduction in risk rather than a net increase in risk.”

 

Mr Petty said that one housing association client had identified a £200m spend on fire safety work. “Over 10 years that’s not much of an issue but because the pressure is to get on with it much sooner, they want to do it in two or three years or as fast as possible,” he added.

• This article was amended to show that Guinness’ plan to reduce its 10-year development programme from 20,000 to 12,000-13,000 homes represents a 40 per cent reduction, rather than a 70 per cent reduction as previously stated. The 70 per cent reduction was based on figures initially reported by S&P, but subsequently corrected in a revised ratings note. We apologise for the error.