The mantra that the nation needs more housing is getting wearisome.
The root causes behind the housing shortage are complex and there is no magic bullet. On the demand side we have a changing demography - a rising population and divorce rates require more houses. On the supply side, too few houses are being built and those that are tend to be for the wealthier market. Although under-occupancy is a serious issue there is little incentive for retired people in larger properties to downsize – stamp duty and negligible interest rates make sure of that. Although the large housebuilders are building at capacity they are often not building the houses the country most needs. So what is the solution?
The answer lies in a cohesive set of policies across Government. Possibilities include stamp duty exemptions to encourage downsizing along with high yielding government bonds for the surplus cash generated from downsizing, off-site construction (prefabrication), more training to bridge the skills gap, and, importantly help for SME housebuilders.
The financial crisis hastened the decline in the building industry as small developers found it increasingly hard to raise money. The small developer can be much nimbler than the big housebuilders and can build on the type of small sites in which the large builders will be disinterested. 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 require a quick turnaround of projects, leading to shorter land acquisition to completion times but this requires local authorities to be fast and flexible too – adjectives not usually associated with them!
SMEs could therefore, and should play a crucial role in delivering the new homes we so desperately need. However, to do so, help is needed to overcome the current barriers for the SME housebuilder:
Development finance - SME housebuilding finance must become easier. Many lenders still refuse to consider lending to small housebuilders, no matter how healthy their order books may be. The lack of appetite amongst lenders means that the cost of borrowing is too high to render the majority of small projects viable.
The Government has started to address this problem through a variety of funding schemes for SMEs. One significant support would be for the government to provide guarantees on private loans for small developments.
Small sites - Improving the availability of suitable small sites is vital to empower SME builders. The current focus on the provision of large sites within Local Plans militates against the smaller sites, without which SME housebuilders have nowhere to build. In addition, cutbacks to local authority planning departments have had a detrimental impact on services to developers.
Application process - Once a small developer manages to find a site there are additional barriers to overcome. The cost of bringing small sites through the application process, in order to comply with an array of legislation and regulations is disproportionate. That the smallest of micro sites has to go through essentially the same planning application process as a site for 500 homes is uneconomic, can easily jeopardise the profitability of a scheme.
CIL - Smaller builders do not have the economies of scale of the large housebuilders and the types of home needed are smaller with lower profit margins. The Community Infrastructure Levy (CIL) charges can make schemes financially unviable. Public money may therefore be needed to make some schemes viable especially if as a society we care about the size and density of our housing.
Governments and banks are quick to tell the industry to build. But it is governments and banks that set the rules of the game, and until the rules change to help the smaller housebuilder, we will not see the homes built that we need.
Governments (of all colours) are rarely great listeners at the best of times and when they do, they tend to listen to the big boys as that is easier for them. We need Government to take seriously the SME housebuilder and enter into a dialogue that will result in a changed climate for them. The National Federation of Builders and the Forum of the Built Environment are pushing hard to do just this - otherwise it will be another can kicked down the road.
David Eaton MBE FCA
David is Director of SME Strategies which supports SMEs. He is an active member of both the National Federation of Builders and the Forum of the Built Environment.
http://smestrategies.co.uk/
david.eaton@smestrategies.co.uk.
Tel: 07841 215182