Chief Executive Brian Berry at the Federation of Master Builders argues the case of SME house builders who could, and should, play a crucial role in delivering new homes. He outlines the challenges they face…
If there is one thing we can all agree on, it’s that solving the housing crisis is no mean feat. The root causes behind the lack of housing go back decades, and there’s certainly no single solution that will bring this crisis to an end. What’s clear is that it won’t be possible to significantly increase the delivery of new homes without significantly increasing the capacity of the house building sector. In other words, we need more small house building firms to enter the market.
The SME house building sector has been in long-term decline for decades now, but this decline was greatly accelerated in the years following the financial crisis as demand for new homes plummeted. The number of SME developers fell by more than half in the years 2008 to 2014 – a startling statistic that underlines the challenging environment smaller firms were forced to operate in. Even with the resurgence in the housing market, the businesses that survived are still finding things difficult and conditions are particularly tough for any new entrants.
The decline of the SME house builder isn’t just a hard luck story – it’s done enormous damage to this country’s ability to deliver enough homes. In the 1980s, it was SMEs who built two-thirds of the country’s new housing stock. The 1980s were also the last time England’s house building figures exceeded 200,000. This is no coincidence. Large developers won’t ever be able to increase their output to a significant enough degree without a strong supporting cast of small local builders.
Smaller developers are versatile, with an appetite to build out the smaller sites that bigger companies aren’t always interested in. Cumulatively, these small sites have huge potential when it comes to meeting the demand for new homes. This means infill and smaller-scale brownfield sites – the sort of sites that are less contentious when it comes to seeking planning permission. SME business models also demand a quick turnaround of projects, leading to shorter land acquisition to completion times. These strengths mean that SMEs could, and should, play a crucial role in delivering the new homes we so desperately need.
But how do we empower the small local builder?
First and foremost, we must improve access to development finance for SME house buildings. The plummeting housing market in the late 2000s left many of the major banks exposed and most of these lenders will still refuse to consider loaning to small house building firms, no matter how healthy their order books may be. It means that the costs of borrowing for SMEs are now enormous. What finance is available will come at the cost of substantial fees that can damage a projects viability, and the shared lack of appetite amongst those major banks that are willing to lend will only provide finance for around 60% of a project’s value. Moreover, a lack of access to rolling capital makes maintaining multiple sites a real struggle, as firms can only borrow on a project-specific basis.
The government has attempted to address this problem through a variety of funding schemes for SMEs and in January, they announced a ‘direct commissioning pilot’ which will see the direct employment of smaller firms to build over 10,000 new homes on publically-held land. One innovation they could introduce to further support the sector would be for the government to provide guarantees on private loans for small developments.
Improving the availability of suitable small sites is also vital if we are to empower SME builders. Currently, there is an excessive focus on the provision of large sites within Local Plans for the delivery of housing numbers. This trend is very concerning because, without the provision of smaller sites, SME house-builders have nowhere to build. In addition, cutbacks to local authority planning departments have also had a detrimental impact on services to developers.
Once a small developer manages to find a site however, there are additional barriers to overcome. The disproportionate cost of bringing small sites through the application process makes life very difficult as they are forced to comply with an array of legislation and regulations. The fact that even the smallest of micro sites have to go through essentially the same planning application process as a site for 500 units seems bizarre but is, unfortunately, the case. The costly protracted planning process can easily jeopardise the profitability of a scheme, a massive deterrent for many would-be developers. Then there are the onerous council-imposed affordable housing contributions and Community Infrastructure Levy (CIL) charges, which burden small developers with further overheads. In short, SME house builders are suffering at the hands of a planning system that in many ways, is better-suited to larger developers.
Whitehall has made some progress on addressing these issues and Ministers have employed some pretty creative thinking in their attempts to reduce costs and speed up planning applications. However, given that we are still only building 140,000 homes per year and are aiming for upwards of 200,000, there is much more that needs to be done. â–
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Brian Berry
Chief Executive
Federation of Master Builders
Tel: 0330 333 7777