The Building Safety Levy is here - what it means for development viability, brownfield land and gateway 2

The Building Safety Levy comes into force today, affecting major new residential developments in England and posing another project viability challenge for developers. 

Having been legislated under the Building Safety Act 2022, followed by formal guidance on its implementation published in July last year, the levy was created to help fund remediation of historical residential building safety defects.

The levy will be paid by developers on schemes that result in new dwellings, new bedspaces in purpose-built student accommodation (PBSA), and schemes involving a change of use to residential. It applies to any building control application under a planning permission that meets or exceeds the major development threshold of 10 dwellings or 30 PBSA bedspaces.

Local authorities will collect the levy and the rates have been weighted using average house prices across different areas. Ranging from £12.70 per m² in County Durham to £100.35 per m² in Kensington and Chelsea, the levy is expected to raise roughly £3.4bn over 10 years.

Housing associations are exempt from paying the levy, but many will continue to rely on joint ventures with the private sector to fund new affordable homes. Under the guidance, if a joint venture isn’t fully owned by a housing association that qualifies for exemption, a project will lose its exempt status.

Although this is just one example of nuance for housing associations to consider, the wider impact on development viability for private developers requires further thought.

The pressure is on developers

With some developers already responsible for paying for historical building remediation, the introduction of this new levy may feel unwelcome.

Some in the sector are asking for the same responsibility to be placed on manufacturers, but this doesn’t appear likely to change any time soon. As for smaller, less experienced developers that had no involvement in the historic building failures, this levy creates an even tougher environment than that which existed in recent months.

However, whatever view you take, the new regime is now in place.

In some cases, smaller developments may be reduced to fewer than 10 dwellings to avoid triggering the levy threshold 

Development viability, scheme delivery and project economics will all come into focus as a result, but effective cost planning can help mitigate major risk. The Building Safety Levy, alongside other viability pressures such as broader regulation and accelerating materials inflation, presents a financial challenge for developers. However, Frankham Group’s Market Update this summer found that following several years of exceptional volatility the market is now stabilising, but not yet recovering.

The levy rates are set per m² and the charge is calculated on the floorspace of the development. From a developer’s perspective, opportunities to maximise spatial efficiency by reducing non-saleable areas are likely to be welcomed. This may not produce the best places to live, but it should mean more homes become available.

In some cases, smaller developments may be reduced to fewer than 10 dwellings to avoid triggering the levy threshold. The problem here is that this will only make it harder to reach the government’s target for new homes. Developers may instead attempt to renegotiate land values to cover the levy, prolonging the development process as a result.

A further consideration is the potential 50% discount on the levy for developments built on qualifying brownfield land. The appeal of brownfield land is already clear from a planning policy perspective, and this additional benefit should only enhance its proposition to developers.

Gateway 2 speculation

At the start of September, Building Safety Regulator figures showed more than 1,650 gateway 2 applications were live - up more than 100 in the preceding month alone. The BSR suggested the Building Safety Levy may have encouraged developers to submit applications early.

The primary focus with gateway 2 applications must be that they are complete, robust and technically sound

However, I believe this is coincidence rather than connection. The primary focus with gateway 2 applications must be that they are complete, robust and technically sound; incomplete submissions will result in rejections and delays that could ultimately cost more than the levy they seek to avoid.

Furthermore, while some of the applications registered in August were for new higher-risk buildings (HRBs), the majority were for HRB internal works - a promising trend, highlighting building owners shifting focus towards internal remediation.

Ultimately, the levy’s introduction has been confirmed for more than a year and developers with the right support should not be surprised by the additional costs for which they are now liable. Nor will it be a surprise if project economics shift so that viability is achieved. Development is a complex business, and one that must be viewed from different perspectives.

This is exactly why it’s important that we all remember the purpose behind the levy. Through the additional remediation work that will follow and the enhanced building safety regulations to which new developments are now subject, the built environment sector is rewriting its legacy - and building a new one to be proud of.

Robert Ray is associate director at Frankham Group