This blog is the first part of our series on the Building Safety Act 2022 (BSA) and its impact on the real estate development industry. Throughout this series we’ll explore the steps that developers and lenders can take to navigate some of the challenges posed by the introduction of the BSA. In this blog I will focus on how the “Gateways”, particularly “Gateway 3”, have created new project risks for both lenders and developers.

Background

The BSA was the much-needed legislative response to the Grenfell Tower disaster, designed to make homes in high-rise buildings across the country safer by giving residents and homeowners more rights and protections. The BSA established the Building Safety Regulator (BSR) and overhauled the planning and building-control process for residential buildings at least 18 metres or seven storeys tall in England.

As part of this, the BSA introduced three gateways which are crucial to ensuring the safety of higher-risk buildings. Gateway 1, known as the “planning gateway”, mandates that appropriate fire safety measures are incorporated into a scheme. Gateway 2, known as the “pre-construction gateway” focuses on demonstrating that the building design complies with all applicable regulations before construction commences. Gateway 3 meanwhile, known as the “pre-occupation gateway”, stipulates a final sign-off from the BSR before a higher-risk building can legally be occupied.

Precede fully supports the objectives of the BSA in ensuring the delivery of safer homes; however, the sentiment from conversations with developers is that, like many public bodies, the BSR is under-resourced and struggling with the implementation of the new regime. For schemes currently underway we are hearing of significant delays particularly around Gateway 3, which are causing frustration for developers and lenders alike.

Whilst we remain hopeful these delays will be resolved, currently the BSR’s lack of resources is creating a bottleneck within the market, as having reached practical completion we understand many developers are waiting anywhere between three to six months for Gateway 3 approval. This is against a statutory period of 12 weeks for the BSR to consider a Gateway 3 application and the updated guidance on its website, effectively acknowledging these capacity restraints, advising developers to allow 12 to 18 weeks for applications to be considered.

To put this in context, in a statement from the Parliamentary Under-Secretary for Housing, Communities and Local Government issued on 13 September 2024, it was confirmed that “Within the period up to 30 June, the Building Safety Regulator (BSR) received 606 applications for amendments to existing higher-risk buildings (HRB), with 12 determined within the eight week period and 271 extensions agreed with the applicant. Within this category, there were almost as many refused applications, totaling 260” and the “BSR received 62 new applications, with four determined within the 12 week period, 22 extensions agreed and 10 refusals.” This clearly demonstrates how few applications are making their way through the regulator within the statutory timeframes.

The Gateway 3 Risk Explored

For developers of higher-risk buildings currently under construction, this is proving to be a real challenge as their development programmes predate the introduction of the BSR and such delays wouldn’t have been anticipated.

Without Gateway 3 sign-off developers are unable to commence any sales or letting activity. For PBSA schemes these delays are a particular challenge. If schemes don’t reach practical completion by roughly mid-June, allowing for a minimum (and currently optimistic) 12-week wait for Gateway 3 approval, they risk missing occupation for the start of the academic year, an outcome that could severely impact rental performance for up to 12 months until the next student intake in the following academic year.

Lenders, like us, typically provide developers with buffers to programme for the various milestones in their facility agreements, giving developers some room for manoeuvre. However, the lengthy delays being experienced could not realistically have been anticipated. This means there is a growing risk of developers running out of interest roll-up headroom under their existing development loan facilities and being asked to meet interest payments from equity, until the development can be occupied and begin generating crucial income (whether from sales or rental). These delays may well lead to developers breaching other funding conditions, such as milestone dates for completion, occupation, lettings or sales, which risks their facilities going into default, further disrupting their cash flow and operations at a critical stage when a development should be entering profitability.

For lenders, ongoing delays within the BSR could well mean the financial underwriting used to assess the viability and risk of their loans is no longer accurate, exposing lenders to increased risk. Combined, this may result in a more conservative lender-appetite, triggering a further slowdown in construction activity as developers struggle to access the desired financing for these larger, and typically city-centre focused, higher-risk buildings.

The Bigger Picture

It’s important that we, and the Government, recognise how delays within the BSR are stalling efforts to deliver the volume of new housing required. Analysis from Bloomberg suggests that the new Labour government will need to build the equivalent of a new city the size of London to make up for five decades of below-target construction. Keir Starmer’s talk of building 1.5 million new homes during this Parliament is admirable and has provided a fillip to the construction industry, but it will ultimately be in vain if blockages, like those within the BSR, are not tackled head-on. Without timely intervention, and provision of the necessary resources and funding, the ongoing delays will continue to hinder development and deprive the UK of the many new homes it urgently needs. As part of this drive, it is imperative that these much-needed higher-risk buildings in our urban centres can clear the BSA Gateways within the statutory timeframes.

Addressing these challenges will require a multifaceted approach. First and foremost, there is a pressing need for the BSR to be adequately resourced to handle the volume of sign-off requests efficiently. This should involve increased funding, staffing and streamlining processes to reduce waiting times.

In the interim, developers and lenders need to adapt their strategies, with enhanced forward planning and adding longer buffers to development programmes and underwriting models to avoid nasty surprises down the road. With the inevitable trade-off on returns for developers, lenders may require greater contingency and/or include more headroom in interest roll-up facilities to avoid deals becoming distressed as a result of delays. Ultimately, resolution depends on collaboration between the industry and government, to ensure practical solutions are implemented by the BSR that balance safety and efficiency.

In the next blog in this series, I’ll examine the rising importance of bridging loans in overcoming some of the challenges presented by the BSA and outline how these shorter-term loans can address funding gaps for higher-risk buildings.