HC 1652 Communities and Local Government CommitteeWritten submission from BuildStore Financial Services

Summary

Consumer interest in self build housing in the UK appears to be growing. BuildStore’s data suggests that between since 2009, demand for private self build finance had grown by over 30% in the UK and its land database, PlotSearch, has a register in excess of 80,000 people looking for building plots and properties for renovation and conversion.

Key reported market drivers for this demand include:

a lack of affordable and suitable “new build” market homes (especially since recession & collapse of speculative house building market);

an increased availability of plots (particularly in depressed markets);

the drive to greener and energy efficient living; and

the effects of the media and increased marketing.

The appeal of self build is the ability to design and create a home that suits their needs, very often for less than they would pay on the open market. As well as an opportunity to create a customised home, financial gains are also an important factor. Self builders can secure an in-built equity in the new property, typically achieving typically 25%–30% more value in the property than the total cost of the development. Self builders also pay a much smaller Stamp Duty bill, and do not pay VAT on their materials.

The result is that since its emergence in the 1970s, the UK self build sector has become an identifiable marketplace, with its own dedicated businesses, supply chain, media outlets, representative associations, brokers and mortgage products.

However, there are some important challenges holding back the growth of the UK self build industry.

Key obstacles uncovered (which are also affecting the wider house building industry), include:

availability of (self build) development finance;

availability of suitable land in sought-after locations;

disproportionate planning regulations; and

Lack of support from industry.

Self Build’s contribution to the housing market should not be ignored, particularly in light of the collapse of the dominant volume housebuilding market, and recent commitment from Government to support and grow the sector, through a range of policy and regulation changes. If the potential of the market is to be realised—the aspirant market is thought to be as high as 100,000—these obstacles need to be addressed, particularly in relation to finance and land availability.

(1) Self Build’s contribution to housing supply

While self build housing has never been seen as a volume option for housing procurement, it has provided a steady supply of quality homes year on year. The advances in the market, coupled with Government support and political reform means that there is now a greater likelihood that the self build sector will grow and become a mainstream contributor to the housing market.

Market Size

When The Joseph Rowntree Foundation commissioned the “Barlow” report on the self build market in 2001—“Homes to DIY For”, it was estimated that the size of the self build market in 1999 was around 15,000 units, and worth over £2 billion.

It concluded that the self build market could be grown to more than 20,000 units annually, but in order to overcome the barriers, the industry would need to be overhauled and modernised through reforming land supply, planning policy and finance. The report also highlighted the need for “stronger intermediaries” or “system integrators”, to act as a go-between for self builders and industry suppliers, including land, finance, labour and materials.

In the years after the Report, the self build market peaked around 2006–07, reaching 17,000 completed homes, including major renovation and conversion projects).

The onset of the credit crunch in 2008 and recession through 2009 and into 2010 hampered self build, and annual output levels dropped below 10,000 units.

In 2010 and 2011, the market has made a slow recovery, with a total of 11,000 self build homes completed in 2011, according to data released by Homebuilding & Renovating in its Self Build Market report in December 2011.

Demand and Potential Market Size

Despite a lack of official records, we have been able to acquire reasonably realistic snapshot of current demand, using BuildStore’s PlotSearch online land database.

There is proportionally a larger number of subscribers to this database (over 80,000), based on the perceived size of the self market, and these subscribers are regularly polled. We have also been able to analyse ore broadly the way our database is used and searched to identify trends and illustrate demand.

PlotSearch is the largest online land database in the UK, with over 8,500 building opportunities, which includes plots, renovation properties and conversion projects.

Research carried out in August 2011 examined the number of plots available in various geographic areas, set against the number of people searching for land in those areas. Our findings show that demand outstrips supply across the whole country. In the South East for example, we see that for every available plot, there are 20 people searching. In London, that rises to one plot for every 100 people searching.

The table below shows the ratio of plots to people searching in each UK region:

Region	Ratio of Plots to Persons Searching
London	0.01
South East	0.05
South West	0.11
West Midlands	0.13
East	0.18
North West	0.18
North East	0.29
East Midlands	0.32
Yorkshire	0.40
Scotland	0.75
Wales	0.80
Northern Ireland	7.48

The distribution of searches conducted in the six months to August 2011 show that the South East is the most popular region, closely followed by the South West.

Region	Percentage of All Searches
South East	20.32%
South West	19.43%
Scotland	13.20%
East	11.91%
West Midlands	8.63%
Wales	6.41%
East Midlands	5.89%
North West	5.47%
Yorkshire & the Humber	4.25%
North East	2.34%
London	1.53%
Northern Ireland	0.62%

What is not shown by these figures is that the location of plots is a major factor, and lack of availability of plots in sought-after areas and conurbations is an overriding issue throughout the country. Scotland is prime example of this. It is the third most popular search area, but the location of plots are not in the areas where people want to live—a large proportion of them are in isolated rural spots in the far North, rather than across the central belt, close to where people currently live and work. This trend is common in all areas in the UK, where there are disproportionately fewer plots in major towns, cities and built up areas.

Demand for self build finance has also continued to grow year on year, and both mortgage enquiries and mortgage completions throughout 2011 were up on 2010, by 16% and 15% respectively. With enquiry levels demonstrating enough demand to require over £1.2 billion of extra lending, there is a case to increase the availability of mortgage finance for self builders.

The latest Datamonitor UK Mortgage Map predicts that the sector will double in size over the next three years to reach annual gross lending of £1.9 billion by 2015 and will take share from the overall mortgage market:

Motivators

There are number of reasons why people choose to build their own homes. Typically, the initial motivator is a change of lifestyle, which dictates for example, re-location, down-sizing to smaller property, or upgrading to a larger property.

However, the motivation for self build in these circumstances usually stem from a dissatisfaction with properties on the open market; the option to design and specify a property that suits their requirements and lifestyle; and the ability to save money and make financial gains.

Quality of Homes

Self builders provide a significant portion of the detached housing stock in this country—around one third of all new detached homes.

Furthermore, because they are not motivated purely by profit, self builders are known to build better quality homes, with better design credentials, using the latest Modern Methods of Construction (MMC) to get a higher standard of construction.

Self Build homes are typically:

Detached homes with decent-sized gardens.

Two storey, four-bedrooms.

Average size = 218 sq m, as compared with a UK average of 104 sq m.

Carefully designed and constructed.

Higher specification of materials and build quality.

More energy-efficient.

Green Building & Innovation

As the issue of climate change and sustainability remains high on the agenda, and the Government continues to incentivise energy efficiency and use of renewable sources, people becoming are more aware and educated about environmental concerns, so it’s not surprising that there is a developing trend towards environmentally friendly and responsible living. Self builders have always been at the forefront when it comes to using innovative products and new technologies, and this is no different with energy-efficient and renewable systems in the home.

In a recent poll of BuildStore customers, almost a third of respondents cited “going green” as one of the main reasons for building their own home, driven primarily by concern for the environment, but also, by the long-term cost savings, and income from the Feed-in Tariff scheme. As innovation and investment in the industry continues to reduce the costs of the technology, the shorter the payback period.

“Going green” will be a growth sector for the foreseeable future, particularly with energy process rising and the FiT scheme offering a 25-year tax free income. For those who wish to have a more energy-efficient home and reduce their energy consumption overall, self building provides the ideal opportunity to reduce the carbon footprint of the construction process, and the completed home, through use of natural and recycled products and materials, as well as incorporating new technology, for example, Solar PV Panels, ground or air source heat pumps, and super-efficient windows.

Supporting the Construction Supply Chain

The sudden collapse in national housebuilding has had a significant knock-on effect right through the supply chain affecting providers of labour, manufacturers of materials and construction professionals.

The self build industry is worth around £2 billion per year in materials, labour costs and professional fees. Self build projects help to support local labour supply and local skill bases, helping to strengthen local businesses and boost local economies.

As well an average budget of £70,000 for materials, each self build project provides the equivalent of seven full time construction jobs for on year.

Below is a typical example of labour construction labour & professionals required for each self build project:

Trade	No. of weeks of work	Number of workers	Total days per project	Average cost
Architect	4	1	20	£3,700
Structural Engineer	1 day	1	1	£400
Groundworker	6	3	90	£14,940
Bricklayers	2	3	30	£5,520
Roofer	2	2	20	£3,600
Electrician	3	1	15	£2,895
Plumber	3	1	15	£3,405
Plasterer	3	2	30	£5,580
Carpenter	6	2	60	£10,440
Decorator	3	2	30	£4,170
Tiler	2	1	10	£1,440
TOTAL	34 weeks	19	321 days	£59,790

Volume Self Build

As the speculative housing market underperforms, a new volume-production model is needed to stimulate growth. Building on the self procurement ideas outlined in the 2009 publication Self Build Moving Centre Stage, our organisation is working on Community and Custom Build models which breaks with traditional profit-driven development and allows individuals to purchase land on larger sites specifically for self build.

These types of scheme have the potential to assist people in developing their own homes themselves or working in groups, allowing them to be more involved with the design of their property and either saving money or achieving a higher quality than they would be able to buying on the open market.

The model is very flexible and can be tailored to suit different types of people in different areas. Grouping individual builds together on larger sites removes the requirement for large scale development finance that has been so difficult to obtain in recent years, while creating significant numbers of new homes. Financial products are available to the individual builder, who can not only achieve equity in their new home but also claim back VAT on the materials used.

Land may be sourced from Local Authorities with land they can release or redistribute for housing. This means councils can benefit from the New Homes Bonus scheme, local construction industries are given a boost, and lenders can play a role in funding new housing in their local communities. The aims of the project can be defined by the Local Authority—for instance there may be a requirement for affordable housing options aimed at young families, or a luxury development to draw wealth generators into the area.

The flexibility of the Community and Custom Build models means that practical elements, such as how the plots are established and marketed, and who takes responsibility for securing Planning Permission and putting in infrastructure, can be tailored to the particular needs of the local area.

The schemes can also suit shared ownership and shared equity purchase models. For instance, a local authority may prefer to provide land at no initial charge and allow the scheme participants to buy out their plot over an extended period of time via staircasing, allowing them to purchase gradually without paying rent.

Alternatively, where there is a local housing association with development funds available, affordable housing could be hived off for a shared ownership scheme. Where there is already a substantial amount of affordable housing in an area, but still a requirement for a percentage of new development to be allocated to it, community builds are a potential solution as self builders can still complete their homes at around 10% less than market value which may be considered an affordable option.

Building as part of an organised development means that the project is more secure, providing the lender with reassurance, as well as making the process itself easier for the client. This means there is more chance for people with low incomes or low deposits to become involved in an affordable venture to build their own home.

Buildstore is working with a number of Local Authorities to support community building projects via project management or individual self build mortgage provision. For instance, a pilot Community Build scheme has just received approval from Swindon Borough Council offering 12 self build plots on the site of the former Windmill Hill Primary School, and serves as a strong example of how the self build model can be used to boost housing supply.

In Stoke, self build housing is being promoted as part of a significant regeneration scheme to bring “wealth creators” to the area. At the other end of the scale, Cherwell District Council is developing a district-wide self build programme across a number of sites and using a range of models to include affordable and intermediate housing. A number of other schemes are under consideration across the country, and the Homes and Communities Agency has released six sites as trial developments offering self build plots at Derbyshire, Bristol, Surrey, Stoke, Hemel Hempstead and Milton Keynes.

(2) Challenges and Barriers to entry

Land Availability

There have always been insufficient building opportunities to meet with individual demand, making it challenging for self builders to find sites—currently around 80,000 people are signed up to land-finding database PlotSearch. Our independent research has consistently shown that finding land is one of the most significant barriers to self build, 35% of respondents in a recent survey stating that it had taken them longer than two years to find a suitable building plot.

Ensuring that more land is made available for building projects, in the right locations is a key element in widening the self build market as a potential housing solution. Whilst there is a proportion of self builders who re-locate to more rural areas—usually “empty-nesters” and those close to retirement—to enable self build to become a mainstream solution, making land available in major conurbations is essential. We are increasingly seeing a response from Local Authorities who wish to include a provision for self build in their local development plans, for instance we received a request for information from Teignbridge Council recently detailing the number of subscribers to our land finding database registered in their area, and we were able to confirm suitable demand. As it appears that evidencing the requirement for self build land is difficult for Local Authorities, we are now considering issuing this information across the board in order to assist.

Self builders struggle to find land not only because there is a supply shortage; cost is another major barrier. In March 2009, 53% of clients answering a survey we conducted said that finding land at a price they could afford was one of their biggest hurdles. Land frequently usurps one third, or even half of the average self builder’s budget. If land were to be offered at a reduced price as a means of assistance, this would have a substantial impact on the accessibility of self built housing. A suitable method of achieving this would be for local authorities to release publicly owned land at a reduced price, or on a shared equity basis potentially as part of a self procurement scheme, thus creating more land at a more affordable rate, significantly widening opportunities.

Finance and Lending

Self build lending was disproportionately affected by the credit crisis, has yet to fully recover. There are not enough allocated funds to meet current demand levels, despite the low loan to value and high margin that self build mortgages offers Lenders.

From around 35 lenders offering self build mortgages in 2005–06, in 2007–08, there were less than a dozen. In the last two years BuildStore has brought some new lenders into the market, but lending capacity and lending volumes are far from what they were in 2006.

Furthermore, the type of lender has changed, and the self build finance market is now dominated by small regional building societies, which have much lower lending capacities. The table below shows the current lenders in the market:

LENDER	Exclusive products through BuildStore
Advance stage payment mortgages
Bath Building Society
Hanley Economic Building Society
Saffron Building Society
Melton Mowbray
Arrears stage payment mortgages:
Bath Building Society
Chorley Building Society
Ipswich Building Society
Shepshed Building Society
Hanley Economic Building Society
Furness Building Society
Darlington Building Society
BM Solutions
Dudley Building Society
Ecology Building Society
Halifax Building Society
Holmesdale Building Society
Leeds Building Society
Lloyds TSB Scotland
Loughborough Building Society
Norwich & Peterborough Building Society
Nottingham Building Society
Progressive Building Society
Scottish Building Society

As well as restricted capacity, lending criteria also tends to be restrictive, particularly given the temporary requirements of the self builder. The tightening of lending criteria across the mortgage market has hit self funding harder, due to the majority of self builders needing to fund two mortgages simultaneously, for at least a part of the build period. Crucially, the traditional lending multiples that usually apply are too low for self build. Most self builders will have another property, and it is unrealistic to think, in the current market, that they will sell this property before they complete their build.

On average, only one in four mortgage enquiries currently make it to application stage. This is over half what it used to be pre-credit crunch. Tightening of lending criteria has led to drop in mortgage enquiries reaching application stage, accounting for almost half all enquiries failing to proceed to application.

Because the lending is market is dominated by regional lenders, this often puts geographical constraints on lending, for example, self builders in Scotland are disproportionately affected by a lack of mortgage products.

Another concern is that some lending policies do not cover some of the MMC and eco construction methods and products, such as cladding materials, which are popular with a lot of self builders.

The amount that self builders can borrow during the course of construction has reduced. Pre-credit crunch, typical borrowing on traditional schemes was 75%–80% of land and build costs; BuildStore had exclusive advance schemes offering up to 95%, thus providing additional cash flow for self builders. Currently however, 75% lending is more typical for traditional products, with BuildStore’s advance scheme offering up to 85%.

(3) Lender attitudes to Self Build

Lenders need to respond to the self build market, and address the need for more meaningful, practical products in order to serve the sector appropriately.

Lenders often shy away from the self build lending market, because of the perceived risk they are exposed to—the risk that borrowers fail to finish the build. However, in reality, that risk is very low, and the incidence of loss is minimal. BuildStore has seen an average repossession rate of 0.46% since 1998, and arrears rates are also low:

Year of completion	2002	2003	2004	2005	2006	2007	2008	Total
Percentage of mortgages in arrears	0.0%	0.15%	0.0%	0.74%	0.82%	0.88%	0.28%	0.41% average
Comparison: CML arrears percentage	1.04%	0.87%	0.89%	1.06%	0.98%	1.07%	1.88%	1.11% average

BuildStore has established infrastructure and risk management systems to deal with customers and monitor each project, and working with lenders, has developed specialist products that are both practical for borrowers, and offer profitable margins for lenders.

Working with an experienced finance specialist, such as BuildStore, lenders can reduce their exposure to risk, by taking advantage of other protection products, such as a specialist indemnity policy and Build Out Cover, which allow lenders to offer practical products, and reduce their loss on the rare occurrence of repossessing a partially built property.

Lenders in the self build market can benefit from:

Low end LTV—BuildStore customer average final LTV is 59%.

High margins—self build products are profitable for lenders.

Mature and experienced borrowers.

Low risk.

Low arrears.

Conclusion

The Government has already acknowledged the need to boost the supply of new homes and develop alternative procurements routes, in order to meet demand levels and bring stability to the housing market.

Developing a mainstream housing procurement route based on the self build model will benefit consumers, industry suppliers and lenders, and will provide a more robust, accessible and sustainable form of housing, for both private and public sector markets.

Factors which have so far inhibited the growth of the self build model, such as availability of suitable plots of land in key locations, and access to finance, are reasonably well documented and understood, and now need to be overcome in order to expand the self build market.

These barriers could be addressed by applying the self build model to volume solutions, such as Community and Custom Build schemes, which would create more opportunities for self builders in their own communities, deliver better sites and locations, and allow lenders to develop new funding products, with the added reassurance of a fully managed development.

February 2012