The home building industry has flourished in recent years. Demand has soared and housing delivery has reached record levels with more than 1.2 million new homes built in the past five years alone. However, this singular view fails to tell the full story.
As the representative body for home builders in England and Wales, the Home Builders Federation’s (HBF) membership consists of developers from the largest household names to the smallest local businesses. However, with the largest companies responsible for the vast majority of the growth witnessed since 2013, the importance of small and medium-sized enterprise (SME) developers to housing delivery, and the obstacles impeding their ability to grow, are far less understood.
Much of the misunderstanding around the sector reflects the significant diminution of SME developers since the early 1990s. While small developers were responsible for four in every ten new-build homes built in 1988, this has fallen to around just one in ten today. The decline has been exacerbated by the 2008 global financial crisis, and more recently by the impacts of the coronavirus pandemic, cost inflation, and labour and materials shortages. There are also several systemic challenges relating to planning, finance and red tape, however which, if left unresolved, will prevent SME home builders from ever reaching their full potential.
Delays in the planning process are impacting all developers across the country, regardless of size, but the effects are felt most acutely by SME builders. The limited availability of suitable housing sites, and the constant struggle to secure viable planning consent, has a huge tangible impact on SMEs’ ability to grow. Planning processes are beset by delays, and poor resourcing at local authority level creates additional costs and uncertainty. Indeed, our 2021 survey of SME builders, run in conjunction with Close Brothers Property Finance and builders’ merchants Travis Perkins, found 94 per cent of respondents saw delays in securing planning permission or discharging conditions as a major barrier to increasing housing supply.
While larger companies can mitigate risk across dozens of sites in some cases, for small firms, encountering delays on one or two sites will be the difference between a year of growth and a year of contraction. While there are some positive measures contained in the government’s Levelling Up and Regeneration Bill (LURB) – for example proposals to speed up the creation and adoption of local plans – it is far from a silver bullet.
To tackle these issues fully, we need the government to ensure local planning authorities are adequately resourced and tackle the inefficiency resulting from a lack of prioritisation and resources. They should consider possible options for depoliticising planning decisions at a local level too. Government also needs to ensure forthcoming government policy, including the revised National Planning Policy Framework (NPPF), includes an emphasis on bringing smaller sites forward through the local planning process, particularly if the requirement for a five-year land supply – where councils with up-to-date local plans will no longer need to demonstrate a five-year supply of housing sites – is to be removed, as is currently proposed in the LURB
Bureaucracy in the development process is a source of frustration for most house builders, but, again, while larger firms are adequately resourced and well equipped to negotiate the delays and excessive costs involved, for small developers and, in particular, start-ups, these considerations are critical to the survival, let alone growth, of the business.
While resourcing of the specific planning functions within a local authority is a frequent source of frustration, associated services can also make the business environment more challenging. The process of obtaining approval from highway authorities for new roads and the terms and costs involved with authorities adopting new roads on completion can often add months onto development timescales. In an increasing number of cases, builders report that highway authorities are reluctant to adopt new roads at all.
HBF would encourage the introduction of key performance indicators (KPIs) or similar for highways authorities to highlight the underperformance of many (and the responsible approach taken by others). Developers would also welcome a single set of standards for highways design. These are often highly technical matters and there is no reason why there should be such a significant local variation.
Meanwhile, the terms of financing for residential development have become extremely difficult for small house building companies over the past decade or so.
While the availability of finance has not been a tier one concern in recent years, the terms on which that finance is available means that recycling equity on developments takes considerably longer than in the past, hampering firms with big growth ambitions. Lenders have drastically changed their attitudes to the sector since the global financial crisis, and their risk appetite also correlates to the risk and uncertainty inherent in the planning process on which all developers rely – which, inevitably, tempers the approach of banks and specialist funders that have diminished visibility as to when they will see their capital repaid.
One of the solutions HBF has put forward to mitigate this issue is the introduction of a government guarantee for development finance lenders of up to 20 per cent of development costs. We consider that by underpinning private lending with a government-backed guarantee, this could enable home builders to secure more favourable terms and higher effective loan-to-cost ratios.
The position of SME developers is increasingly precarious. If we are to make further increases in housing supply and tackle the housing crisis effectively, it is vital that SME builders are not only supported to survive, but to grow, expand and thrive. After all, returning to the number of home builders operational in 2007 could help boost housing supply by around 25,000 homes per year.
That is significant not just for housing delivery but for the economy – it would generate a further £4.2bn in economic activity and almost £700m investment in affordable housing. In these testing times, these are advantages we cannot afford to ignore.