Getting The Nation’s SME Housebuilders Building Again

Getting The Nation’s SME Housebuilders Building Again

Historically, SME builders accounted for two thirds of new housing supply in the UK, but today they account for just under a third. What happened and what needs to be done to help them start building again?

The UK residential market has insufficient housing stock to meet the projected future growth in the UK population, never mind meet today’s needs. Part of the problem is we’re just not building enough new homes. Figures from the Federation of Master Builders (FMB) show that although the number of households in England alone is growing at a rate of 220,000 per annum, in 2014/15 only 124,520 new homes were built.

Some property experts argue the housing crisis is being exacerbated by large housebuilders ‘land banking’ – sitting on major holdings of land and controlling the flow of housing to the market. In their defence, bigger developers cite ongoing shortages in skills and materials, as well as a lack of investment in apprenticeships, as the key factors hampering growth. Indeed, a report by the Greater London Authority in 2012 showed that 45% of planning permissions for homes in the capital were held by private individuals, historic landowners and investment funds, rather than developers with intention to build.

Historically, such inertia from larger housebuilders wouldn’t have been a problem, as SME housebuilders would have stepped in to fill the void. However, over the last few years, the SME sector has been noticeably absent. So what’s stopping it from helping to address the country’s chronic undersupply of housing and what needs to be done to ensure they get building again?
Planning costs

In the late 1980s, two thirds of all new homes delivered in the UK were built by SME housebuilding firms, according to data from the National House Building Council (NHBC). Since then, the contribution of SME builders has continued to decline, with only 30% of all new homes delivered by firms of this size today. This reduction is largely down to the number of SME housebuilders in the UK having halved since the global economic downturn.

“SME housebuilders suffered greatly in the wake of the financial crisis,” says the FMB’s head of external affairs, Sarah McMonagle. “The economic downturn that followed 2008 caused demand for new-build homes to plummet.”

The housing market and the economy may have recovered significantly since the dark days of 2008, but there are still a number of barriers in place that are restricting the ability of SME housebuilders to increase output. One recurring problem is planning, according to Colin Fell, chairman of Doncaster-based developer Marrico.

“Planning isn’t easy, thanks to all the environmental legislation that has gone through in the last few years,” says Fell. “It’s also time-consuming because local authorities don’t have enough planners – they just don’t have the money they need to employ them.”

Then there’s the spiralling expense of going through the planning application process. “The question isn’t can you get planning – it’s the cost,” says Mark Quinn, managing director of Canterbury-based developer Quinn Estates. “To go for a scheme now costs thousands of pounds and an SME will not have the same financial balance sheet to withstand doing two or three applications to create a development pipeline.”

“To go for a scheme now costs thousands of pounds and an SME will not have the balance sheet to withstand doing two or three applications to create a development pipeline”

Mark Quinn, managing director, Quinn Estates

But the biggest factor deterring SME housebuilders has been difficulties in accessing finance. In the FMB’s House Builders’ Survey 2015, 62% of respondents said that finance was a major problem.

“Although housing demand is now bouncing back, the SME sector is still struggling to access the finance necessary to capitalise on the resurgent market. This is not only hobbling innovation and competition in the housebuilding industry, but also compounding the housing crisis by reducing the building capacity of these firms,” says McMonagle.

Ten years ago, SMEs could borrow at a much higher leverage than they can today, so they carried much less risk. But the structure of debt has changed, driven by regulation control and capital costs, and banks have reset their boundaries for the appropriate level of debt-equity split. These days, the developer has to commit a sizeable amount of equity into each scheme and for a longer period of time.
New financing options

One option that a growing number of SME housebuilders are exploring to get around the funding conundrum is peer-to-peer lending. Robert Weaver, director of property at residential crowdfunding platform Property Partner, says the company is increasingly helping to fund projects led by SME housebuilders.

“We’ve just bought 15 flats from a developer who has built a scheme right in the middle of Colchester,” says Weaver. “By taking a nice big chunk of his flats we’ve derisked the scheme for him, so it works for him and it works for us.”

He adds that the company recently did a similar deal for a small housebuilder in Hastings, who built a scheme consisting of five houses. “He just wanted to get off site and get the money in so he could finish off another site,” explains Weaver. “So we bought four from him. I think we can do a lot more deals like that in the future.”

Although Mark Quinn hasn’t taken advantage of peer-to-peer lending platforms to date, he believes alternative finance providers do have an important role to play, helping entrepreneurs fulfil their ambitions when banks may be unable to do so.

“Peer-to-peer lending is a positive step because it’s giving young entrepreneurs the chance to crack into what’s a pretty closed shop,” he says.
Government intervention

Quinn is an advocate of anything that gets Britain building again, which is why he’s a strong supporter of the government’s ‘starter homes’ scheme, which promised to build 200,000 new homes for first-time buyers under 40 by 2020. He’s not the only one: some 56% of respondents to the FMB’s House Builders’ Survey stated their belief that the scheme could make business sense for them to build and sell.

“To me, starter homes could be really interesting,” says Quinn. “As a builder you get a bit more money and it’s also quite a simplified way of boosting supply to the market.”

The government’s announcement in January that it would directly commission the building of homes on publicly owned land was also a welcome initiative, but the land needs to be broken down into smaller infill sites and micro parcels to really benefit the smaller operators in the sector.

Brian Berry, chief executive of the FMB, said in response to the announcement: “The availability of small sites is the greatest barrier that SME housebuilders currently face when delivering new homes […] If the government wants to truly tap into the potential of SME housebuilders, it should bring forward a range of packages of land, including those attractive to the smallest of developers, thereby improving both capacity and speed of delivery.”

Boosting supply is going to be vitally important if the government stands any chance of hitting its housing targets. In September last year, housing minister Brandon Lewis said he wanted to deliver one million new homes by 2020, but unless more is done to aid the UK’s depleted SME housebuilding sector, Lewis’s vision will remain a pipe dream.

“Ministers are certainly facilitating dialogue between lenders and smaller developers, and have launched initiatives like the Builders Finance Fund to more directly improve the borrowing options available to small firms,” says McMonagle. “Nevertheless, more can still be done to aid the type of smaller housebuilding firms which were building two thirds of the nation’s housing stock as recently as the late 1980s, but are now only building around a quarter of domestic properties.”

 

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