SME builders and developers are a missing segment of our housing market, but the time is right for a resurgence of these vital businesses. Government knows this, and the SMEs – companies that deliver between 1-100 homes a year – were firmly on the agenda in the Government’s recent Housing White Paper.
“We will diversify the housing market, opening it up to smaller builders and those who embrace innovative and efficient methods.” Theresa May, PM, in the Housing White Paper.
And the mood is buoyant too. Of the nearly 500 companies 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. So what’s changed?
After centuries of being a considerable aspect of our housing delivery market, 2007 marked a change in the fortunes for SME builders.
In its Small Housebuilders Report, the NHBC found that registrations of new builds with them fell from 28% in 2008 to 12% in 2015 for SMEs.
The main reasons attributed to this decline were:
1 Problems and costs of obtaining building land. SMEs faced competition from the deep pockets of the volume builders. The Federation of Master Builder’s (FMB) 2016 House Builder Survey listed this as a key barrier to SME activity.
2 Less readily available finance and fewer movers added to the problem.
3 Increased legislation and planning responsibilities meant that many SMEs found themselves out of their depth in a more bureaucratic world.
In contrast, the major builders have greater finance and personnel resources to address the increased planning burden, which many SMEs struggled with.
Facing already squeezed margins, the SME sector shrank, with those building the smallest numbers of homes the least able to cope.
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.
The upshot is the volume builders have developed homes where they know they can sell most lucratively, and not where housing is needed. At their heart, they’re businesses like any other, so why change a profitable model when you don’t need to?
For example, Redrow posted its results in September 2017 (for the last financial year), with record revenues and profits: revenue grew by 20% to £1.6 billion and pre-tax profit rose by 26% to £315 billion.
Clearly, for their shareholders they’re doing the right thing. But how does this record-breaking profit square up to our national housing market? And is it even their responsibility?
Following the results, Wales Online reported that Welsh-based Redrow explained that it confined its main housebuilding activity in Wales to the M4 corridor, due to higher building costs in the rest of Wales, especially in comparison to England. It said: “Sadly the days of building in many other parts of Wales are not viable at the moment.” Steve Morgan, Chairman.
It makes you realise how much profit they make on each home if trickier sites are not “viable”.
The major housebuilders won’t change their models, and there’s no real reason why they should as private companies.
But what’s imperative is that we need SMEs builders and developers to deliver additionality, something in addition to what’s already happening. Only through this will we end up with houses being built where they’re needed.
In addition, there are frequent reports that point to consumer dissatisfaction in quality and longevity of the estate offerings of the major builders. Add to this questions over homes of little architectural merit and dubious practices, such as the now banned leasehold houses, and you start to get an understanding of the general malaise in the market.
The good new is that the climate is changing for SMEs for the better, with Government now incredibly supportive of the sector. And even better, the small scale of most developments makes custom build an ideal model for SME activity, especially as so many development opportunities are between 5-50 units.
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.
So the climate is right for a return of the SMEs. And custom build offers the perfect opportunity for bringing on developable land, especially with the Government’s support.
Financing options are opening up, and there’s a ready market of customers thanks to the Right To Build Legislation and its requirement for councils to keep a register of would-be custom builders, together with a duty to permission sufficient plots to meet this demand.