The latest research from Sirius Property Finance has shown that it’s crucial the government introduces measures to increase the number of small to medium sized housebuilders. The number of SME developers, who typically deliver between 1 to 1,000 homes per annum, has decreased by 80% since the late 80s.
So why do we need these smaller players when we have national housebuilders delivering in volume? The SME has long been billed, by those in the know, as the lifeblood of regional property markets. In comparison to the big-name developers, SMEs usually focus on smaller projects that would be otherwise overlooked – for example, inner-city sites that don’t meet the minimum quotas of the larger businesses.
SME builders provide more diverse stock and innovation as they have the ability to be nimble and they also support other smaller property professional practices such as smaller law firms and local architectural practices. Last but by no means least, many are leading the way in low carbon building practices.
The data shows that in 1988, there were 12,215 SMEs operating across England – delivering 77,524 new homes to the market. That was 40% of all new homes, with an estimated market value of more than £4.6bn.
In comparison, the latest data shows SMEs are on the verge of extinction with just 2,500 currently operating across England. That’s an 80% reduction since 1988, at a rate of 335 SME developers a year. As a result, the number of new homes built on an annual basis by SMEs has reduced from 40% in 1988 to just 12% today. The only silver lining is that far higher new-build house prices mean the value of this 12% is higher than the 40% built back in 1988 at almost £5.8bn.
SMEs have long proven their contribution to economic growth and value to the micro-markets and communities in which they operate, so what has been contributing to this decline?
Since the late 80s SMEs have faced various challenges, including a reduced level of opportunity due to not one, but two financial crashes. Perhaps more notably though is the argument that the UK’s planning system, driven by housing targets and a shortage of local authority staff, has been prioritising larger schemes. This continues to cause delays that disproportionally affects smaller housebuilders, many of which simply do not have the cash flow to sustain such time lags. Whilst larger housebuilders have the resources to begin one project whilst awaiting planning on a handful of others, for smaller entities this is not viable even with clever use of debt to leverage. Sirius has helped numerous developers utilise bridge loans whilst awaiting planning but, in some circumstances, continued delays in the planning process mean it’s not always a viable option to enter into a short-term product without an exit in sight. A lack of buying power in an increasingly fraught supply chain has also seen many leave the market.
But is change on the horizon? In February of this year, the government’s housing accelerator, Homes England, together with United Trust Bank, announced a £250m fund aimed at supporting SME builders – with the additional carrot of development finance available up to a 70% loan to gross development value.
This long overdue government initiative is, of course, welcome but is it too little too late?
It’s certainly good news that the government is finally recognising the important role that SMEs play in delivering much-needed housing stock as well as creating greater diversity and competition, and the hope is that these measures will encourage experienced developers back into the market and attract new entrants with fresh perspectives. It’s also good news that there are plenty of finance options for those developers that are investigating new schemes.
The Home Builders Federation 2021 survey found that development finance was rated as the lowest barrier to growth by SME housebuilders, with 41% not considering this to be a barrier to growth. Further data analysis by Sirius uncovered a ‘post pandemic development finance boom’, showing that that whilst overall UK real estate lending declined 23% from 2019 to 2020, lending focused on the financing of new real estate developments bucked the trend, increasing by 6.9% in the same time period.
Whilst no one is disputing the importance and value of the national housebuilders, there is certainly room and requirement for more niche builders and a greater variety of competition to keep standards high. Who else is going to tackle the quirky historic building conversions and pocket-sized inner city brownfield sites if not the SME developer?
The playing field needs to be levelled. Otherwise, we face the undesirable prospect of a property industry without this vital subsector and an inevitable decline in vibrancy and character. The specialist development lenders that Sirius works with have a strong appetite for supporting SMEs and are willing to provide the flexibility required by this group. This, combined with the government’s pledged support, could be the turning point that sees a reversal of the downward trend – and smaller developer numbers on the rise again.
By Kimberley Gates, Head of Corporate Partnerships at Sirius Property Finance