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Meeting housing demand Contents

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Chapter 4: SME housebuilders

92.A prevalent and concerning trend in the development of new homes has been the sharp decline in SMEs housebuilders: in 1988 SME builders constructed 39% of new homes; by 2020 this had dropped to 10%.161 While the industry as a whole has grown in recent years, housing delivery has increasingly relied on a smaller number of large developers, as shown in Figure 9.162 The number of SME housebuilders has approximately halved since 2007; many have been acquired by larger builders over the years or ceased operations.163 When discussing this sharp decline, the Minister said: “we have to get those numbers back up.”164

Figure 9: Output by size of housebuilder

Source: Savills and LDS, A review of the availability of development sites for SME housebuilders in England and Wales (2021): https://ldsyoursite.com/savills-sme-housebuilders-report-demonstrates-huge-potential [accessed 16 December 2021]

93.In this chapter, we consider how to ensure SME housebuilders can contribute to meeting housing demand. We look at the three major challenges identified by SMEs—planning, land availability and funding—and discuss how they may be addressed.

Advantages of a diverse and competitive housebuilding market

94.The loss of SME housebuilders has clearly affected the industry’s ability to meet its housebuilding targets. The Home Builders Federation calculated that returning to the number of home builders operational in 2007 could help boost housing supply by 25,000 homes per year. Even a return to 2010 levels could help increase output by 11,000 homes per year.165

95.The House of Lords Economic Affairs Committee’s 2016 report, Building more homes, concluded:

“The large private builders operate a business model which makes commercial sense for them but does not deliver an increase in the supply of new homes on the scale required. The market has oligopolistic characteristics: the eight largest builders build more than 50% of new homes and smaller builders find it difficult to operate.”166

These characteristics still dominate the housebuilding landscape. The largest four developers complete around 60,000 homes annually, approximately one third of the total.167 Brian Berry, Chief Executive Officer of the Federation of Master Builders, told us: “If we are going to deliver [more homes], we need to increase capacity in the housebuilding industry. We need to create a more diverse housebuilding industry. We need to overcome the barriers that SME housebuilders face.”168

96.We heard that, in addition to providing competition for the volume housebuilders, there were advantages to ensuring that SME housebuilders could continue to develop homes. Brian Berry told us:

“Local housebuilders tend to live in the community in which they are building, so their reputation is at stake. They make sure that the homes they build are of high quality. Consumers are reported as being twice as satisfied with the quality of homes built by local housebuilders as compared with those built by one of the volume housebuilders.”169

97.As most SME developers live and work within their community, they also contribute to shaping local communities. The Land Promoters and Developers’ Federation said: “In recent years, housing development has become focused within a fewer number of larger builders, hence housing design has tended to become more standardised and housing layouts can take a strikingly similar form.”170

Addressing the barriers

98.SME housebuilders consistently identify three main barriers to development: planning, land availability and funding. The Government is aware of these barriers, as identified in their submission to our inquiry.

Planning system

99.Complexity and delays in the planning system, which we discuss in detail in Chapter 5, act as a barrier to SME housebuilders in particular. In addition, smaller builders have a particular struggle with the uncertainty of decision making including with respect to Section 106 obligations. LDS, a company which provides sales guarantees to SME housing developers, said that while it is “understandable that planning authorities are rigorous in process, for many SMEs, the planning system itself is a deterrent.”171 Research by the Home Builders Federation found that 48% of SME housebuilders say the planning system is constraining their output.172

100.We heard that delays in securing planning permission have a significant impact on SMEs who, unlike the big developers, are often not able to use funds raised from one site to fund another and lack internal capital. The Home Builders Federation said: “Over the past 30 years, the process of obtaining planning permission has become riskier, costlier, and more complex.” They added: “While larger companies can mitigate risk across dozens of sites in some cases, small firms encountering delays on one or two sites will be the difference between a year of growth and a year of contraction.”173 As we discuss in Chapter 5, appeals processes are increasingly being used, especially in areas with no local plan. The Home Builders Federation said: “For SME developers in particular, the expensive and drawn-out appeals process can cripple the balance sheet and cash-flow, delay important business decisions and stifle opportunities for growth and housing.”174

101.The Minister told us that one of the aims of the Government’s proposed planning reforms is to “make sure that the planning rules would be sufficiently predictable to make it much more attractive for land to come forward, particularly for SME developers”. He added “it would therefore encourage them to get into the marketplace to develop.”175 The Minister recognised the impact of planning delays on SMEs; he said SMEs “do not have the bandwidth to wait around for a long time, which the present system tends to encourage”.176 This could be addressed through enabling a system of ‘pre-packaged’ planning permissions for small sites and providing a fast-track for SMEs.

102.The UK Collaborative Centre for Housing Evidence suggests that reducing planning risk and delay could have wider benefits for the sector, as it would reduce the ability of large developers to control the supply of new homes within a local market to maintain house prices.177

103.The role of SMEs in the housebuilding industry has seen a sharp decline: in 1988, SME housebuilders built 39% of new homes, by 2020 this had dropped to 10%. The Government should encourage SME housebuilders in order to diversify the market and maintain competition.

104.Local authorities should support SME housebuilders to navigate the planning process. One focus of the Government’s planning reforms should be to reduce planning risk by making decisions more predictable and reducing delays, which will benefit SMEs. The Government should work with local planning authorities to create a fast-track planning process for SMEs.

Land availability

105.In addition to planning risk, a major challenge facing SME housebuilders is the limited number of small sites for development. Brian Berry told us “If you want more diversity and creative design, you must provide that land.”178 In order to address this barrier, he pointed to the need for local plans to identify more small sites, rather than just large strategic developments. He said: “Local authorities find it easier to deal with one larger housebuilder compared to lots of local housebuilders … It is too easy for local authorities to rely on volume housebuilders to provide the homes needed.”179

106.We asked Homes England what they are doing to help SME housebuilders access suitable land for development. They told us that for Homes England sites over 500 homes, they typically pursue a ‘master developer’ model and split the site into smaller land parcels which are then sold and developed separately, giving SME developers a realistic prospect of a successful bid.180

107.An additional way of increasing the availability of small sites is to grow the number of self-commissioned new homes. Around 13,000 homes are self-commissioned in the UK each year.181 In some markets, such as Austria, Germany, Poland and Japan, self-commissioned housing is the dominant form of housebuilding.182 An independent report, commissioned by the Government, on scaling up self-build and custom housebuilding by Richard Bacon MP was published in August 2021.183 The report recommended a new Custom and Self-Build Housing Delivery Unit within Homes England to enable the creation of serviced building plots on small and large sites and support the delivery of custom and self-build housing at scale.

108.Wider adoption of the ‘master developer’ model, where larger sites are built out by a number of different housebuilders, would help SME housebuilders bid for more secure developments. The Government should require local planning authorities and Homes England to increase the percentage of homes on larger sites each year which are built by SME housebuilders.

Finance

109.Access to finance is one of the key barriers for SME housebuilders who often have limited cash resources. As the Minister identified, SME housebuilders “tend to live hand to mouth; they build to sell to get the cash in to build again.”184

110.Homes England told us that they provide debt and equity finance through programmes such as the £4.5 billion Home Building Fund, which was announced in November 2020. Homes England’s aspiration is for the programme to deliver more than 73,500 homes; this finance has already supported 306 SMEs who hold contracted or approved deals. However, we heard that the value of loans agreed through the Home Building Fund reduced by 44% last year.185 The Government has also set up the ENABLE Build Guarantee with the British Business Bank which will make available up to £1 billion of guarantees to support finance for smaller housebuilders.186 The Minister said that Homes England supports SMEs through “resources and expertise to help SMEs, essentially, grow their businesses and help them to learn the softer skills that you need to build a business from a smaller scale to a slightly larger scale.”187

111.The Home Builders Federation recommends that the Government provides guarantees to lenders to help bridge the gap between current lending terms and enable higher loan-to-cost ratios (perhaps from 60% to 80%). It suggests that the Government should take action to help lenders identify and address the “structural issues” that prevent SMEs accessing finance on reasonable terms.188

112.Access to finance is one of the key barriers for SME housebuilders. The Government should work with lenders to encourage them to provide more support to SME housebuilders on commercial terms.

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