Small Housebuilders: A new dawn on the horizon
Housing output has increased significantly in recent years and the government continues to show a commitment to increase this further still. However, much of the increase is due to larger house builders with the number of smaller to mid-sized (SME’s) house builders declining over the years.
One reason for the decline in the number of SME’s in the market is because of the complexities and the associated costs of planning and regulatory systems. Another reason is the lack of finance available, in the main owing to the risks and delays involved at the planning stage which means that terms offered by lenders for borrowing by SME’s serve to restrict growth.
What can be done to help SME builders? This has been addressed in a report ‘Reversing the decline of small housebuilders’ [Home Builders Federation (2017, Reversing the Decline of Small House Builders)]
Much of the problem faced by SME builders is the availability of suitable housing sites and contending with a planning process beleaguered by delays and red tape. The report suggests several steps that the government could take:
- To alter the definition of a ‘small’ site. Small sites (usually the 10 unit mark) may be exempt from various measures and policies. One possible solution would be to increase the definition of a small site to 20 units to alleviate the disincentive for SME builders to develop larger sites.
- Create a presumption in favour of residential development on appropriate brownfield sites.
- Increase the buffer required in Five Year Land supplies.
- To provide for a greater variety of sites within local plans.
- Create a duty to properly test the actual delivery from allocated sites and to plan for additional allocations where supply falls short.
- Change the classification of garden land.
- Introduce a new phased planning application fee schedule to encourage performance and delivery within Local Planning Authorities.
- ‘Help to Plan’ scheme for micro builders and start-ups.
Finance is another problematic area for SME builders. The availability and terms on which borrowing for residential developments have become increasingly difficult since the Global Financial Crisis and of course, potential lenders are far from encouraged by the risk, delay and uncertainty during the planning process.
Many SME builders will rely on project finance on a site by site basis, unable to mitigate risk over several sites. There are higher costs associated with development, in turn, headline interest rates are higher.
The loan to cost ratio is adversely affected by the fact that the developer will enter its equity into the scheme and profit will not be realised until the lender has recovered its fees.
The report suggests several potential solutions to some of these issues:
- Government action to encourage lending.
- Lifting barriers for builders to access government support enjoyed by SME’s in other sectors.
- A ‘Help to Build’ scheme using government guarantees to support SME expansion.
Red tape poses significant problems for small housebuilders, namely in the form of increased costs and significant delays.
Highways, water and land registration are the 3 main areas where red tape can cause problems.
One of the main solutions arising from the report is to seize Brexit as an opportunity to look at reforming EU regulation to help SME builders to deliver homes in areas where there is demand.
Other suggestions included:
- A huge overhaul of the Highways Act 1980.
- The provision of appropriate roads being dealt with in a similar way to Building Regulations, to tackle the monopoly currently being held by local authorities. This would also surely go some way to relieve some of the burden on local authorities.
- Government backed guarantees for bonds to secure s38 Agreements.
Only positives could come out of the government taking steps to help SME builders. Increasing the number of SME’s would help to bring about an increase in housing output and would bring far reaching benefits to towns and cities.For further information relating to this article, please contact Gemma Lawn, Senior Solicitor or another member of the Housebuilders team.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.