9 February 2017
The Home Builders Federation (HBF) recently published a report revealing that, following a period of decline, the number of smaller housebuilders is now on the rise. Hurrah! We breakdown the findings, exploring the backdrop to this turnaround and its potential positive impact on housing supply.
According to the report, the headline indicators of housing supply are ‘unremittingly positive.’ Housebuilding has increased by more than 50% in just three years; and builders increased their output by 11% in the last year alone.
In broader terms, measuring supply in floor space or the number of new bedrooms in the dwelling stock, the growth in supply is even greater than this headline figure. Furthermore, HBF’s largest member companies report that they have serious and realisable plans to expand investment even further in the next three years.
These statements are frequently echoed in the reports of publicly listed companies and others, even in a period of greater uncertainty following the outcome of the EU Referendum earlier this year and a slowing housing market brought about by Stamp Duty changes. Evidence of the appetite to build more homes can also be seen in recent data on planning permissions. In the year to June 2016, consent was granted for 275,000 new homes.
These positive developments mask an underlying and worrying trend though. Over the past 30 years, housing supply has become more dependent than ever before on a small number of providers. Small, private housebuilding companies have dwindled in number, very few new entrants have secured a foothold, and even established firms have struggled to grow.
“The recent period has been a successful one for the home building industry as a whole. Responding to Government policies to promote home ownership and increase housing supply, the sector has expanded its output at an unprecedented rate following a very difficult time in which survival was the name of the game for even the largest of companies.
“Indeed, the Global Financial Crisis, its impact on the housing market and the effect on our industry qualifies as the most challenging time in my 35 years in home building. However, the vast majority of the growth witnessed since 2013 has been attributable to the largest companies which is in stark contrast to the experience after previous downturns when new entrants and small firms made a greater contribution to upswings in housing supply.” (Stewart Baseley Executive Chairman - Home Builders Federation)
The battle to obtain planning permission is often cited as the reason behind the decline in SME homebuilders:
“This decline is the principle cause of the housing crisis and can be traced back to the ‘Genie out of the bottle’ 1990 Planning Acts; combined with the financial crisis of the late 2000s. Obtaining planning permission today is a bureaucratic nightmare and beyond the resources of many SME builders; it is a real barrier to entry – even if they can obtain finance.” (Steve Morgan CBE Chairman - Redrow plc)
• Post-war housing supply peaked at the same point that entrepreneurial SMEs in the sector were flourishing.
• In 1988 small builders were responsible for 4 in 10 new build homes compared with just 12% today.
• The advent of the plan-led planning system in 1990 has also contributed to a reduction in medium-sized builders, while national housebuilders have also reduced in number.
• The average permissioned housing scheme has increased in size by 17% in less than a decade, suggesting many sites allocated in local plans are out of reach for smaller companies.
• Small sites are consistently efficient in their delivery of new homes across multiple market areas.
• Delay and risk during the planning stage has influenced lender attitudes to housebuilding, meaning that terms SMEs borrow on are restricting growth opportunities.
• In just the period 2007-2009, one-third of small companies ceased building homes.
• Returning to the number of homebuilders 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.
• Measures to remove blockages in the planning system, reduce red tape and bring about fairer finance for SMEs would enable more companies to realise their ambitions, reinvigorating the entrepreneurial spirit of previous decades.
Barriers to entry and growth in the industry are many and varied. In many cases, small and medium-sized firms share many of the frustrations experienced by larger, national companies but some obstacles are specific to the SME, such as:
The availability of suitable housing sites, and the constant struggle of securing an implementable planning consent through a planning process beset by delays and bureaucracy, create delays and costs for SMEs that have a tangible impact on their ability to grow. 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.
Availability and terms of financing for residential development has become extremely difficult for small housebuilding companies over the past decade or so. Lenders have drastically changed their attitudes to the sector since the Global Financial Crisis. Of course, lenders’ risk appetite correlates to the risk and uncertainty inherent in the planning process on which all developers are reliant.
Bureaucracy in the development process, in addition to that directly linked to planning is a source of frustration for most housebuilders, but, again, while larger firms are adequately resourced and well equipped to negotiate the delays and excessive costs involved, for small developers and, in particular, start-ups, these considerations are critical to the survival, let alone growth of the business.
There are three main areas where red tape can be particularly harmful for SMEs’ prospects: highways, water and land registration all of which can cause significant delay and uncertainty around costs.
Even with more positive conditions in recent years, in a policy environment that notionally supports small housebuilders, this trend has continued. The introduction of the National Planning Policy Framework (NPPF) has created a much more positive planning system than that which prevailed between the early 1990s and 2012, with more land coming through the system and the Help to Buy scheme to support purchasers which, unlike other previous schemes of its type, is accessible for developers of all sizes.
The period in question, burgeoning red policy decision to make sustainable development of existing residential land more difficult, and an increasingly costly planning process fraught with risk has decimated the SME housebuilding sector. From 2008 onwards, the effect of a system that consistently works against the interests of all builders has been exacerbated by a shortage of development finance available on reasonable terms and at an affordable price. Even as banks have increased lending to small businesses generally, the situation for small housebuilders has improved little over the recent period with lenders still generally very cautious about the sector. Indeed, the recovery from the recession has been rather more muted for SMEs than larger builders. Even as overall supply continues to grow at an unprecedented rate – 52% in three years – small builders are still producing fewer homes today than during the depths of the 2008-9 recession.
We are seeing a generally more attractive environment for housebuilding investment, improved economic conditions and political action to tackle blockages and support first-time buyers - all of which has contributed to unprecedented increases in housing supply by more than 50% in just three years.
However, while the number of homes being built continues to rise rapidly, the number of home building companies has dwindled over the course of almost three decades even as positive policies such as the introduction of the National Planning Policy Framework(NPPF) and the creation of the Help to Buy scheme theoretically makes the sector an attractive one for prospective start-ups and small firms planning to grow.
Rebuilding plurality in the industry would help bring about dramatic increases in housing output. Experience of the 1980s shows that post-war housing supply peaked at precisely the same point as small, entrepreneurial companies were flourishing.
Decades of red tape and additional risk in the planning system makes a return to the level of SME activity as 1988, a momentous challenge. However, even returning to the number of firms operational in 2007 could help boost housing supply by 25,000 homes per year.
Increasing the number of firms operating in the industry would also bring major benefits for the long-term health of the sector and for the economic vitality of towns and cities around the country. SMEs traditionally played a vital role in the employment and training sphere.
The industry shares the Government’s aim to build on recent growth in output. Ministers are interested in exploring new models of delivery such as offsite construction and the public sector directly commissioning construction of new homes, and there may be a greater role to play for housing associations and local authorities, but a wholesale reinvigoration of the SME housebuilding sector would help propel housing supply towards the ambitious targets that we all wish to see achieved. The experience and output of the1980s is instructive in this regard.
The report explores the causes and consequences of the long-term decline in housebuilding activity in sector that was once a hotbed of young, entrepreneurial companies operating at a regional level. It explains how driving additional investment amongst smaller firms could help to achieve speedy and sustainable growth in housing supply, and describes the conditions needed to bring about this change.
Link to the full report by the HBF can be found here.