12 Sep 2017

Why custom build holds the key to maximising your business as an SME builder

Why custom build holds the key to maximising your business as an SME builder

The key to housing diversity in the UK lies squarely with SME builders and developers, that is, small and medium-enterprise companies producing fewer than 100 homes a year. They’re responsive, dynamic and thirsty for work, but they’re also something of an endangered species.

Government recognises their importance, showing support for the sector in the Housing White Paper: “The housing market needs to operate differently if we are to start to address affordability issues and deliver the step change in house building that is required.” 3.1, White Paper.

And custom build offers the perfect route to market for SMEs, as it offers scope for sites from a few homes to several 100, with Government and, local government now ready to boost the sector.

Barriers to SME builders

SME builders’ and developers’ output declined by half from 2008 to 2015, a decline largely attributed to:

1 The problems and costs of obtaining building land.

2 Less readily available finance and fewer movers added to the problem.

3 Increased planning legislation.

The result is a housing-market dominated by six major companies, who build to tight margins with little scope for modern methods of construction, innovation or design quality.

With this decline we’ve lost a generation of builders, missed a generation of training opportunities and missed out on the diversification and quality that the SME builders bring.

Find out the context to the SMEs situation and the current market dynamic here

Support for SMEs and custom build

The climate is changing for SMEs for the better, with Government now incredibly supportive of the sector, as evidenced in the Housing White Paper. The small scale of most developments makes custom build an ideal model for SME activity, especially as so many land opportunities are between 5-50 units.

And the mood is buoyant too. Of the nearly 500 surveyed by the NHBC for its Small house builders and developers: Current challenges to growth, nearly two thirds expect their output to increase in the next two years.

There’s also plenty of legislative support in evidence, including existing policy, such as The Right To Build Registers, and proposed, such as in the White Paper.

In addition, the registers are supplying a ready source of people looking for small sites who need SME companies to partner with.

Positive planning input

In the last decade, much planning activity has supported large sites that are easier to process. Bringing on fewer sites also limits the local opposition that’s slows down all sites, as planner have less to process.

But like government, planners are starting to acknowledge that, as local companies, SMEs represent valuable employment and training opportunities. Placemaking is firmly on the agenda for councils, and again these smaller companies can offer a more personal, local approach to housing supply.

In addition, SMEs are typically associated with quality builds, which is an area that’s come into the spotlight with many larger builders recently.

Again, the White Paper makes very specific commitments to bringing on more small sites for SMEs through the planning system (see below).

Consequently, planners now have a duty to provide serviced plots for would be custom builders and to permission a greater number of smaller sites. It’s logical to join these two strands together.

This means that with custom build you’re boosting the local economy and hitting Government targets. Use this to your advantage in planning meetings!

Land for building

Previously seen as a significant barrier to SME activity, the White Paper makes very precise reference to the supply of land to support SME builders.

“Policies in plans should allow a good mix of sites to come forward for development, so that there is choice for consumers… Small sites create particular opportunities for custom builders and smaller developers. They can also help to meet rural housing needs in ways that are sensitive to their setting while allowing villages to thrive.” Point (1.29 )

This endorsement was backed by a commitment to change the National Planning Policy Framework to,

“expect local planning authorities to have policies that support the development of small ‘windfall’ sites; and indicate that great weight should be given to using small undeveloped sites within settlements for homes, where they are suitable for residential development.” (Point 28)

In addition, it also advocates the sub-division of large land sites to ensure these smaller sites are created, recommending that at least 10% of all sites allocated for residential development in local plans should be of half a hectare or less.

These measures will help remove the barrier to obtaining land that’s been such a problem for SMEs up until now.

The White Paper also set out an expectation that local planning authorities should encourage greater use of Local Development Orders and area-wide design codes to bring on small sites.

Custom build benefits for landowners

As well as Government facilitating more land being brought to market, SMEs can be a preferred choice for landowners looking to sell development land.

In particular, they can offer a good route to market as they may well be more willing to consider unusual or trickier sites. Such sites may not be worth the bother for volume builders with tight profit margins.

In addition, local landowners often like to partner with local companies, as they may be able to look beyond the highest bidder in favour of a better quality development brought on by an SME. This can be especially so if they’re going to be living in close proximity, such as with legacy landowners.

Finance for SME sites

The situation for SME finance has improved dramatically since the NHBC’s previous research in the area in 2014. The Government’s £3 billion Home Building Fund is particularly targeted to SMEs, custom builders and innovators. This short-term loan finance is deliberately aimed at helping smaller building firms bring on sites.

It also recently launched the Accelerated Construction Programme to support diversification in the market by partnering with SME firms.

In addition, the British Business Bank offers a route to SME finance, while Government also encourages SME builders to take up the Help to Buy equity loan scheme on its projects.

Visit the Right To Build Toolkit for details of Government-backed programmes to support small to medium-sized builders.

What’s more, there are more commercial financing companies offering specialist in the market now that contractors and SMEs can take advantage of, such as the National Association of Commercial Finance BrokersFind SME Finance service , or providers such as Bibby Financial Services.

These improved finance routes are also starting to be reflected in increased  consumer finance options, with higher LTV values, and tailored products like the first mainstream custom build mortgages from Virgin.

Housing Growth Partnership also offers investment, backed by Lloyds Bank and Homes England (previously HCA), to address housing affordability. It’s aimed at the regional residential development community working in new homes, with a focus on SME sector.

All of these mean that SMEs, and their buyers, have far greater access to funding, making it easier to bring on infrastructure, develop homes, and sell them to a market that supports custom build as a route.

What can custom build offer SMEs?

The scale of most custom build means that it offers huge scope for SMEs. And it’s worth developing relationships with planning authorities looking to specifically permission sites to meet demand on their registers.

There’s a wide range of models in custom build, operating on a spectrum from serviced-plots with self-build homes on them, such as Graven Hill, to developer-led models that reflect the Government’s definition of custom build, like Heartlands.

Successful SMEs operating in the market show a range of models, such as Potton’s route of leaving the land with the landowner, Quinn Estates serviced plots at Hammill Park, Wynward’s executive homes in a gated development and Fairgrove Homes bespoke homes (pictured).

Within this spectrum is a range of choices, with dominant models yet to establish themselves. These include shell builds, both houses and apartments, such as Naked House’s innovative affordable model, to turn-key solutions. Many businesses also offer a choice of engagement, so purchasers can choose how much, or how little, sweat equity they want to put in.

In addition, custom build also embraces cohousing and community-led models. Again, SMEs dominate in this arena, as there will always be companies with the time and interest to bring on innovative housing that challenges the dominant model.

In conclusion, Brian Berry, Chief Executive of the Federation of Master Builders (FMB), said:

“Growth in the self and custom-build market will increase the opportunities available to many house builders across the UK. In the FMB’s House Builders’ Survey 2014, 89% of SME house builders said that they saw potential for growth in the self and custom-build market and the same number thought that this growth would benefit their business.

“In particular, the self and custom-build sector will provide more opportunities for SME contractors to engage in house building. It could also provide a potentially attractive new business model for some small developers to act, in whole or in part, as enablers of self and custom-build homes.

“We badly need to boost the health and diversity of the house building industry and an increase in custom-build could help towards this by attracting new entrants into the market and creating a new source of supply.”

Credit: Fairgrove Homes

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