Should I invest in an apartment building with exterior cladding?

This article was first published by City AM, Friday 25 October.

The Grenfell Tower fire in 2017 brought into sharp focus the fire risks posed by flammable external wall systems known as ‘cladding’. From a buyer’s perspective the presence of cladding will impact a number of areas, not least the ability to obtain a mortgage, potential remedial costs and the future saleability of the property.

Commonly, cladding will be an issue in high-rise flats or commercial to residential conversions. Cladding which does not meet building regulations and fire safety requirements could affect valuations to the extent where the property becomes unmortgageable and thus unsaleable.

Since Grenfell, lenders have been carrying out extra checks where there is cladding on the outside of a building. Lenders do not want to risk being left with a security they cannot sell in the event of repossession, and some may require a BR 135 fire safety certificate or insist that new cladding is fitted before they consider offering a mortgage on a cladded property.

The government has set out standards which cover the fire safety of external wall systems since Grenfell. Guidance for high rise properties outlines that valuers are expected to identify properties that may have combustible materials, or potential failings in fire safety. In this case they will be unable to provide a valuation, and will give a default value of zero until they receive a report from an independent professional confirming that it is compliant.

The impact on service charges could be substantial if the building owner decides to remove cladding from the apartment block. The costs of removing the cladding could potentially run into millions of pounds, with leaseholders footing the bill by way of service charge payments.

When buying a property in a cladded building, the seller should be asked to provide a copy of the BR 135 fire safety certificate to the lender. Selling to a cash buyer would circumvent this, but the buyer is likely to want a discount to reflect the costs they may have to contribute to replacing the cladding themselves.

Leaseholders in cladded buildings should insist that their managing agents check the flammability of the cladding and put an active management plan in place. This is important both for the leaseholders’ own safety and for those looking to sell, as uncertainty over the type of cladding on the building could delay or prevent sales.

The government’s spending plans for 2020-21 include £600 million funding for the removal of aluminium composite material cladding in the private and social residential sectors. How this funding will be allocated and accessed remains to be seen.