Broad building safety levy threatens housing supply, says expert

The Building Safety Act 2022 provides the UK government with powers to introduce new regulations imposing a building safety levy on certain new residential development under the building safety regime provided for under the Act. The funds gathered from the levy are intended to be used to help fund remediation works to existing residential buildings where safety defects have been identified.

From 22 November 2022 to 7 February 2023, the Department for Levelling-Up, Housing and Communities held a consultation on the proposed new levy. It has now published its response to the feedback it received, confirming, among other things, its intention to impose the levy on a wide range of residential development – as well as applying to most new development of ‘for sale’ housing, the levy would apply to most new ‘build-to-rent’ (BTR) properties, purpose-built student accommodation (PBSA), and private retirement housing.

Natalie Harris of Pinsent Masons, who leads the firm’s BTR practice, warned about the potential impact of those plans on housing delivery in England.

“While it is positive that the government has confirmed that affordable housing development will be exempt from the levy, it is disappointing that the government has chosen not to exempt BTR, PBSA, or private retirement housing,” Harris said. “Those types of development have a significant role to play in addressing the housing shortfall within the UK.”

“The development of new ‘multi-family’ BTR, later living accommodation, and PBSA schemes has slowed down in the face of interest rate rises and inflation, coupled with regulatory uncertainty around second staircases. Applying the levy in these sectors is likely to further constrain supply as additional costs will, inevitably, go to viability – the ultimate impact being to further constrain supply and increase rents and house prices. These markets are particularly sensitive as returns are generated over a longer period than ‘for sale’ products.”

The government said in its consultation response that it recognises the potential impact the levy could have on scheme viability but that it would introduce “a range of measures” to account for that. Among the measures it intends to apply are a “differential levy rate based on house prices in local authority areas” and “a discounted rate for developments on brownfield sites”. Under its plans, developments of fewer than 10 units would also be exempt from the levy entirely.

The government added that, over time, it “expects that the cost of the levy will be reflected in the price that developers are willing to pay for land” and that this would help preserve the viability of new projects.

Harris said: “Recognising that land values and house prices/rental levels differ across the country is positive, but the application of a differential rate will inevitably add complexity and it may not be practical to set regional rates on such a granular level that it picks up very localised market forces. Inevitably, there will be winners and losers.”

Under the government’s plans, the levy would be charged on a per square metre basis, subject to the government undertaking further work on how floorspace would be measured and levy rates set.

Harris said: “The move to a floor area-based charge is positive. It means that developments aren’t penalised for delivering one- and two-bedroom units – demographic shifts mean there is significant demand for these unit sizes. However, developers will be looking for clarity on how the measurement regime will work and what will be included within the calculation. It is important that communal areas are excluded otherwise the levy risks discouraging amenity facilities which help foster a sense of community and resident wellbeing.”

The government confirmed that developers will have to pay the levy to the relevant local planning authority. Those authorities would then be expected to pass on the funds to central government on a quarterly basis.

Harris said: “Whilst local planning authorities are best placed, in terms of having knowledge of developments within their areas, they are already under-resourced and so there is a risk that this will lead to delays. This is of particular concern given that the government intends to withhold or reject final certificates in the event of non-payment of the levy, which will delay occupation.”

The government also confirmed that developers will be expected to pay the levy they owe in a single payment, but it has decided to give developers some flexibility as to when, in the building process, they make that payment.

Harris said: “The response suggests that there will be some flexibility as to when the payment is made – provided it is in advance of the completion/final certificate being issued by the regulator. On the face of it this is positive, as the original proposal was a two-phase payment with a significant proportion payable at commencement of the project and the balance payable towards completion. The large early payment was likely to have a material impact on cashflow/returns and therefore impact on viability. The devil be in the detail here, however. The final position may, ultimately, be worse if it results in the full levy being payable early in the construction process.”

In the case of development of ‘higher-risk’ buildings, the Building Safety Act 2022 provides for a ‘gateway’ system of building control, with approval needed before three core stages of the project – planning (gateway one), construction (gateway two), and occupation (gateway three). In its response paper, the government said that buildings in the process of being assessed at gateway two at the point the levy requirements begin to apply, will be exempt from the levy.

Harris said: “For complicated schemes, bringing developments forward can take a long time. Those involved will have undertaken financial appraisals which may not account for the levy. If it is charged, then this could impact on the viability of the scheme, and so thought should be given to existing pipeline projects that may be affected and whether there is merit in, or scope to, accelerate the building control process to avoid the risk of the charge.”