Less room available for UK’s small homebuilders

London: The UK government’s message that “we are the builders” should signal a boom time for small housebuilders. But in fact the number of small and medium-sized construction firms has dwindled.

Some 27 per cent of UK homes are built by companies that construct 500 or fewer units a year each — down from 44 per cent in 2008 — and while 5,647 small housebuilders were in operation in 2007, there are now fewer than half that number.

“People used to start building houses from being a bricklayer or a joiner. They would begin by getting planning permission for a pair of semi-detached houses. Now it’s far more difficult,” says Steve Midgley, managing director of Derbyshire-based Fairgrove Homes.

The economic downturn caused hundreds of firms to go bust but, unlike in previous cycles, the number of small housebuilders has scarcely recovered as the economy has brightened.

There was a net increase of 30 new firms between 2013 and 2014, but analysts do not expect this to accelerate under current conditions. The immediate problem for smaller companies is finance, as banks are unwilling to lend to what are seen as riskier groups, especially for speculative building or where sites do not yet have planning permission.

Anthony Codling, an analyst at Jefferies, the investment bank, says: “They can’t secure the finance they need to purchase land because lenders want pretty tough loan-to-value limits. Small housebuilders want to build more homes but they don’t have the equity to fill the gap.”

Midgley says his company survived the crisis because of the loyalty of private backers; Fairgrove expects to build about 50 homes this year.

Ministers recognise the problem. In July, the Homes and Communities Agency and Lloyds Banking Group launched a 100 million pound (Dh545.6 million) fund to back small housing developers by taking equity stakes in projects. That followed the launch of a 100 million pound fund by Santander.

But while post-crisis financing has been a struggle, industry figures say this simply exacerbated a long-term trend. Numbers of small and medium-sized housebuilders have mostly fallen since 1988, when they peaked at 12,215, according to figures from the National House Building Council.

John Stewart, director of economic affairs at the Home Builders’ Federation, identifies a wider problem in planning. “Until 1991, housebuilders were in the driving seat. There was a presumption in favour of development, and local authorities had to have a good reason to refuse [planning permission],” he says.

But at that time, concerns over unfettered development led to a major overhaul.

The new approach gave priority to sites slated for construction in local plans — a form of guidance on how particular areas should develop — and moved the onus on to developers to show why any additional sites should be considered for building.

“There was no incentive for the little guys to scurry around trying to find sites, and supply was no longer responsive to demand,” says Stewart.

This resulted in a bias towards larger sites, rather than the compact ones that smaller businesses can handle, says Midgley — a change also driven by the political sensitivities of new development. “It is almost as though councillors prefer to have two big fights rather than 25 little ones,” he says.

Meanwhile, planning costs and the time involved in securing consent have spiralled.

Midgley says costs of securing planning permission for a small site could reach 50,000 pounds — especially problematic or small firms that cannot afford to work on many sites at a time. Charlie Campbell, an analyst at Liberum, says it will be difficult for the industry to meet an estimated need of 200,000 to 250,000 new homes a year without the involvement of small players.

He argues that the “big three” builders — Taylor Wimpey, Barratt Homes and Persimmon — will jointly produce a maximum of 45,000 homes a year in this cycle, down from 60,000 at the last peak.

Last month the chancellor, George Osborne, promised to “amend planning policy to support small sites” and to shorten the planning guarantee, the length of time in which councils are meant to rule on applications. But planning departments face funding cuts that will further stretch their resources, making some industry observers doubt the changes will be enough.

“I’m not entirely sure there’s a short-term or even a medium-term solution to this supply gap,” says Codling.

Stewart backs a more radical idea: returning to a presumption in favour of granting planning permission on so-called brownfield sites, or urban sites that have experienced previous development.

This already exists, but only for specific sites identified in local plans and other documents assembled by local authorities. These miss many of the most promising small sites, he says.

“You need to solve all three - land, planning and finance. One on its own won’t work, but with all three, you’d be motoring.”

Financial Times