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New cladding levy a surprise hit to ASX property developers

A new Victorian building levy to help pay for the combustible cladding fiasco catches apartment developers off-guard at a time when the sector is ending the year on a high.

Residential home prices have rebounded strongly and the Mirvac Group (ASX: MGR) share price and the Lendlease Group (ASX: LLC) share price have outperformed, although the latter is taking a beating today due to an unrelated matter.

The 540% increase in the building levy will kick in on January 1, six months ahead of what the Property Council of Australia was expecting, according to an article by Nick Lenaghan from the Australian Financial Review.

Big new tax

There are hundreds of projects that will be affected as they have secured planning permits but not building permits.

The extra impost is to help fund the state government’s $600 million fund to replace combustible cladding used on 500 privately owned buildings.

The building permit levy jumps to 0.82 cents per dollar for works of more than $1.5 million from 0.128 cents for works exceeding $10,000.

Developers pleading for exemptions

The Property Council believes the unexpected early implementation of the levy could potentially add millions of dollars to projects.

The industry lobby group is urging the state government to grant exemptions to developers who have already committed or started building construction.

It’s hard to say how big a blow this is to the industry, but it could be very significant, especially if other states follow Victoria’s lead. The flammable cladding debacle affects all building nationwide.

At this point, the Victorian government appears to be unsympathetic. The AFR said a government spokesperson pointed out that the January 1 start date was revealed in state parliament back in November.

Levy impact on ASX shares

The extra levy could take the gloss off the sector. The Lendlease share price rallied over 60% since January 2019 even with today’s 5% sell-off as it continues to wear the risk from blowouts of the Melbourne Metro Tunnel project.

The Mirvac share price is also ending the year on a high with a gain of 47%, while Stockland Corporation Ltd (ASX: SGP) follows close behind with a 41% gain. In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index jumped 23% so far this year.

Foolish takeaway

Lendlease could lose its lead going into 2020. The market will be wary of more nasty surprises from the large infrastructure project and the new levy won’t help sentiment either.  

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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