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 last five years alone. However, this singular point of view does not tell the whole story.
As the representative body for home builders in England and Wales, the members of the Home Builders Federation (HBF) consist of developers from the biggest household names to the smallest local businesses. However, with the largest firms responsible for the vast majority of growth seen since 2013, the importance of small and medium-sized enterprise (SME) developers in housing provision and the barriers that impede their ability to grow are much less. understood.
Much of the misunderstanding around the sector reflects the significant decline in SME developers since the early 1990s. While small developers were responsible for four in ten new homes built in 1988, that figure has fallen to around one in ten today. The decline was exacerbated by the 2008 global financial crisis and, more recently, by the effects of the coronavirus pandemic, cost inflation, and labor and material shortages. There are also several systemic challenges related to planning, financing and bureaucracy, which, if left unaddressed, will prevent SME homebuilders from reaching their full potential.
Delays in the planning process impact all developers in the country, regardless of size, but the effects are felt most harshly by SME builders. The limited availability of suitable housing sites and the constant struggle to obtain viable building permits has a huge tangible impact on the ability of SMEs to grow. Planning processes are beset with delays and lack of resources at local authority level creates additional costs and uncertainty. Indeed, our 2021 survey of small business builders, conducted in conjunction with Close Brothers Property Finance and builder merchants Travis Perkins, found that 94% of respondents considered delays in obtaining building permits or conditions landfill as a major impediment to increasing housing supply.
While large companies can mitigate risk across dozens of sites in some cases, for smaller companies, delays at one or two sites will make the difference between a year of growth and a year of contraction. Although there are some positive measures contained in the government’s Leveling and Regeneration Bill (LURB) – for example proposals to speed up the creation and adoption of local plans – it is far from a miracle solution.
To fully tackle these issues, we need government to ensure that local planning authorities are adequately resourced and tackle the inefficiencies resulting from a lack of priorities and resources. They should also consider possible options to depoliticize planning decisions at the local level. The government should also ensure that forthcoming government policy, including the revised National Planning Policy Framework (NPPF), emphasizes the promotion of smaller sites within the local planning process, particularly whether the requirement for a five year supply of land – where councils with until – at present local plans will no longer need to demonstrate a five year supply of housing sites – should be removed, as currently proposed in the LURB
The bureaucracy in the development process is a source of frustration for most home builders, but, again, while larger companies have sufficient resources and are well equipped to negotiate the delays and excessive costs involved, to small developers and, in particular, start-ups, these considerations are essential to the survival, not to mention the growth, of the business.
While the resourcing of specific planning functions within a local authority is a common source of frustration, the associated services can also make the business environment more difficult. The process of obtaining road authority approval for new roads and the conditions and costs associated with authorities adopting new roads can often add months to development time. In an increasing number of cases, manufacturers report that road authorities are reluctant to adopt new roads.
HBF would encourage the introduction of key performance indicators (KPIs) or similar for road authorities to highlight the underperformance of many (and the responsible approach taken by others). Developers would also appreciate a single set of standards for highway design. These are often very technical matters and there is no reason for there to be such significant local variation.
Meanwhile, residential development financing conditions have become extremely difficult for small homebuilders over the past decade.
Although the availability of finance has not been a top concern in recent years, the terms on which this finance is available mean that recycling equity on developments takes much longer than in the past, hampering companies with big growth ambitions. Lenders have radically changed their attitude towards the sector since the global financial crisis, and their appetite for risk is also correlated with the risk and uncertainty inherent in the planning process on which all promoters rely – this which inevitably tempers the approach of banks and specialized lenders who have reduced visibility on when they will see their capital reimbursed.
One of the solutions proposed by HBF to alleviate this problem is the introduction of a government guarantee for development finance lenders of up to 20% of development costs. We believe that backing private lending with a government-backed guarantee could allow homebuilders to secure more favorable terms and higher loan-to-effective-cost ratios.
The position of SME developers is increasingly precarious. If we are to further increase housing supply and effectively tackle the housing crisis, it is essential that SME builders are not only supported to survive, but also to grow, develop and prosper. After all, the return to the number of active home builders in 2007 could increase housing supply by around 25,000 units per year.
This is important not just for housing delivery, but for the economy – it would generate an additional £4.2bn of economic activity and almost £700m of investment in affordable housing. In these difficult times, these are benefits we cannot afford to ignore.