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House-builders: Sweating the small stuff

13 Apr 22 Small and medium-sized house-builders are becoming an endangered species as the big volume builders tighten their stranglehold on the sector. Mark Smulian reports

Despite many good intentions in the 2017 Housing White Paper, Fixing Our Broken Housing Market, very little has happened. The paper set out policies intended to reactivate small and medium-sized enterprises (SMEs) in the sector, but the industry remains dominated by a handful of big volume house-builders. Even the second- and third-tier players are quite large companies.

For small firms hoping to stay in – never mind enter – house-building, things are tough. While sources of finance appear to have become easier in recent years, costs have risen sharply. Shortages of labour and materials, plus the rising cost of land and the effort of grappling with the planning system have all conspired to make the small house-builder’s job more difficult.

While a large company might be able to live with these cost increases, they can create crippling cashflow problems for small businesses.

This article was first published in the March 2022 issue of The Construction Index Magazine.  Sign up online 

If a small builder has bought land, it cannot earn money from it until a house is built, and if that is delayed by the planning system, or by labour and materials unavailability, company finances can become dangerously stretched.

Brian Berry, chief executive of the Federation of Master Builders (FMB) – which mainly represents smaller firms – says: “Small, local house-builders have been producing fewer and fewer homes for decades.

“In the 1980s, 40% of new housing stock was delivered by SME house-builders; now that sits at only 12%. SME builders face significant barriers to the market.”

The FMB’s latest House Builders’ Survey revealed that a lack of available land is affecting 63% of respondents; it was their most common grievance.

This is because, unable to afford the huge sites available to volume house-builders, small builders often seek to develop scraps of land that are omitted from local plans – small sites on brownfield land or in-fill.

So when the builder applies for planning permission it might be for a site not designated for housing, which brings lengthy delays while local authorities work out how to respond.

“What we need to see is the relevant authorities working together, with industry, to properly identify small sites for development,” Berry says.

Over 70% of the 123 respondents to the FMB’s survey said that the number of small site opportunities was decreasing, while ‘inadequate communication by officers” was the most common problem with planning. Only 19% felt either a ‘very high’ or ‘quite high’ degree of certainty over the outcome of planning applications.

One obvious question is why all of this matters to anyone beyond the SME house-builders themselves?

The government’s Fixing Our Broken Housing Market report observed that in 2007 the number of homes registered by small builders was 44,000 but in 2015 it was only 18,000. The report interpreted this statistic as “demonstrating the potential for growth”, on the assumption that if SME house-builders once built 44,000 homes they could do so again, given the right conditions.

Reasoning that small firms need to build more quickly than large ones and get their profits as soon as possible, the government concluded that SMEs could up the rate at which new homes are delivered. It therefore promised to “diversify the housing market, opening it up to smaller builders and those who embrace innovative and efficient methods.”

But five years (and three communities secretaries) later, not a lot has happened to ease things for smaller builders. Given the obstacles faced by the small firms, it is still the volume house-builders who are best placed to meet the government’s target of 300,000 new homes a year, not the SMEs.

FMB chief executive Brian Berry says: “Planning has long been an issue for smaller house-builders, with 62% of FMB members saying it’s making it harder for them to build. Greater investment in local authority planning teams would add capacity and enable faster turnaround times of applications, reducing delays getting on to sites, and easing the strain on finances and resources.

“With the new Planning Bill on the horizon and levelling-up a key pillar of government policy, I hope to see significant improvements to reverse the decades-long decline of SME house-builders,” adds Berry.

The Home Builders Federation (HBF) – which represents the big house-builders but also includes some smaller firms among its ranks – said in its December 2021 survey of members: “The planning process was, again, the most significant challenge that SMEs face and that the problems with the process have worsened over the last 12 months.

“In particular, most respondents could give instances of a development that had taken years for a planning resolution.

“Many respondents also felt that the planning process specifically disadvantaged smaller firms. [This was] partly because larger builders have the financial clout to soak up the costs of the long and complex planning processes, but also because councils are indirectly incentivised to make the planning process more straightforward for large house-builders – as larger schemes enable local housing target to be met more easily,” observed the HBF.

An HBF response to a House of Lords Built Environment Committee report (Meeting Housing Demand) also issued in December, said: “While housing supply has doubled over the past decade, builders – small builders in particular – are increasingly strangled by a planning process that is under-resourced and ill-equipped for the 21st century.

“The country faces a well-documented and critical housing emergency but the complexity, risk and inefficiency of the approval process, is resulting increasingly in a reliance on larger sites, which themselves take years to process.

“While the overarching planning system attracts much attention, it is the day-to-day operation of the process that is causing most frustration and preventing homes being built.”

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It can be highly complex to navigate the tidal wave of policy documents each local authority will possess to govern planning.

This is perhaps easy for an experienced planning consultant of the kind large house-builders can afford to employ, but such skills are a further expense for a small firm unlikely to have such expertise internally.

However Richard Blyth, head of policy at the Royal Town Planning Institute, says: “I’m not convinced that SME builders cannot afford planning expertise as there are a couple of thousand small planning consultancies and there is no need
for them to engage top-flight advice from large firms. I have often in the past seen small developers ask for consultants’ help with appeals and one feels, ‘there wouldn’t be an appeal if you’d talked to them first’.”

Blyth admits that local authoriy planning departments are under-resourced, putting this down to the general severe squeeze on their funds.

He points out that the government rewards or punishes councils according to how many planning permissions they award rather than how many actual homes are built. This means that a planning department working under resource constraints finds that “it is easier to deal with a site for 3,000 homes than [lots of sites] for three,” explains Blyth.

“A site for three homes won’t raise much in planning fees but one for 3,000 will,” he says. “The fault here lies with the Department for Levelling-Up and Communities and how it judges a council’s planning performance. If it used different metrics it would be better.”

Blyth also objects to the government’s habit of piling responsibility for peripheral matters onto planners.

“Planning departments have for about 40 years been asked to do more with less resources including things that are perhaps not natural fits for them, the latest being biodiversity net gain,” he says. “I’m with the SME firms on this. Can it really be right that a site for three homes is crucial to nature recovery? This is not something small builders should be groaning beneath.”

Chris Carr is managing director of Cleethorpes-based Carr & Carr, which builds six or seven homes a year and is in the fortunate position of using land bought long ago by its founder. He says: “Planning splits into policy and delivery, and the planning policy set by the government is not bad; it’s the delivery by some local authorities that is the problem.”

“Some are very good but some, of whatever political colour, don’t want more homes built and will use planning against that.”

He thinks planning should be inspected in the same way that education regulator Ofsted monitors schools, with those judged failing facing takeover by better performers.

The House of Lords report called for a reduction in risk for SMEs by making planning decisions “more predictable and reducing delays” and for the government to work with local authorities to create a fast-track planning process for SMEs, though it did not specify how this might work.

Blyth thinks there are measures that could speed up planning such as ‘pre-packaged’ sites with planning conditions already in place, as proposed in the House of Lords report.

He says: “That is a fantastic idea. I recall that when I worked for a council it bought a large area of land on the outskirts, put in the infrastructure then sold off plots, some to the volume builder but others to smaller ones or self builds who may engage local builders to construct their home. I think public sector land could be used in ways that are helpful to smaller firms.”

There is some help at hand from the non-departmental public body Homes England which, with the United Trust Bank, has established a £250m fund to support small house-builders with development finance. This so-called Housing Accelerator Fund will provide loans of between £1m and £10m.

Homes England’s chief investment officer Gordon More says: “In line with Homes England’s commitment to supporting SMEs, it will help smaller builders get on and build now, as well as improve the lending landscape for SMEs by driving competition in the market, improving choice and encouraging innovation. United Trust Bank has consistently supported house-builders of all sizes and is an experienced and capable lender.”

It is always nice to have money but opinions differ on how large a problem development finance is. The HBF survey found 18% of respondents in the north and 24% in the Midlands saw development finance as a major barrier, but only 3% of respondents in the south did so, and overall 58% of respondents did not see development finance as a barrier to housing delivery.

Likewise, the FMB thinks finance has become less of an issue, possibly due to government intervention encouraging lenders, such as the Homes England initiative. Its survey found finance was deemed problematic by only 29%, though private equity had overtaken high street banks as the main source of finance.

Chris Carr says: “Finance is all too available at the moment with lenders throwing money at anyone building houses because of the current market. They are lending to some companies that are not fit for purpose and they should not be.

“That will end with lenders withdrawing developer finance and that will hit all of us. I’ve seen that in three recessions and they do it because it’s easy: a house-builder has assets that can be sold.”

Labour shortages are a perennial problem in the industry, and according to the HBF survey are now exacerbated by the impact of Brexit and Covid-19. “This has resulted in considerable wage inflation, something that SMEs are less able to absorb than their larger counterparts,” it says.

Similarly, material shortages and the resulting price inflation have “proven to be another significant barrier for SMEs and now features as one of the top three major barriers identified by respondents,” says the HBF, adding that 78% of SME respondents cited the supply and cost of materials as a major barrier to increasing housing delivery over the next 12 months, against merely 20% a year earlier. The FMB’s survey saw materials shortages cited as a constraint by 62% of respondents.

In theory there is much goodwill towards SME house-builders at local and national government levels. The problem is that it’s always easier – and cheaper – to deal just once with a volume builder rather than dozens of times with smaller ones.

This article was first published in the March 2022 issue of The Construction Index Magazine.  Sign up online 

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