Starting small: what support do small scale housebuilders need?
Britain has seen its population of small housebuilders shrink by 80% in a single generation as market dominance has passed to an entrenched group of major players – among the top 10 UK housebuilders, none was founded after 1990. The disappearance of small and medium-sized housebuilders from the UK – defined as companies that complete between one and 100 units a year – has seen their numbers fall from more than 12,000 in the mid-1980s to about 2,400 today, according to research by the non-bank mortgage lender LendInvest.
At a roundtable discussion during the Conservative conference in Manchester, Prospect joined with LendInvest to explore the reasons for this marked structural shift and to ask what can be done to promote a more mixed economy of housebuilders.
Christian Faes, Co-Founder and Chief Executive of LendInvest, pointed out that property and housebuilding entrepreneurs receive far less access to the tax and state-backed incentives offered to those who enter other industries. Housebuilding start-ups are not eligible to raise finance through the Enterprise Investment Scheme, which offers generous tax breaks to investors, and to date the British Business Bank, the UK’s state-owned economic development bank, had not provided any support to non-bank finance providers that target the property sector. At the same time, changes to Stamp Duty and Capital Gains Tax had increased the burden on small landlords and developers who were responsible for refurbishing large numbers of properties for the private rental market.
At the same time, as Richard Bacon MP and Peter Aldous MP pointed out, there was huge appetite to self-build as an alternative to the mass-produced housing provided by the market leaders.
Brian Berry, Chief Executive of the Federation of Master Builders, said the four key hurdlers for his members were access to land and finance, the cost and complexity of the planning system and a restricted labour supply. Although access to finance had become a bigger problem over the past decade as major banks had largely withdrawn from development lending to smaller companies, which they regarded as higher-risk, it was not the most pressing issue, a view supported by property entrepreneur Chris Philp MP. Instead, access to land represented the biggest challenge to small-scale housebuilders, said Berry.
The challenge facing smaller developers was often that councils and other authorities chose to release land in parcels that were too large for them to take on, which helped to reinforce the dominance of the larger players. Richard Blakeway, Chief Housing and Urban Regeneration Adviser at Policy Exchange, recounted the huge difficulties he had faced while Deputy Mayor of London for Housing in making sure a single three-acre plot of land was released for development, saying it had proved far more challenging than arranging the release of larger parcels of land.
Both David Rudlin, Managing Director of the consultancy Urbanism, Environment and Design, and Tom Bloxham, Founder and Chairman of the Manchester-based developer Urban Splash, argued that a system that encouraged “master developers” to take on large sites, provide basic infrastructure, and sub-divide them to suit smaller developers could help to remove the barriers to SME housebuilders. This was how large parts of London and other cities were built, they pointed out.
However, Tom Bloxham also argued that during the time he had been running Urban Splash, the local-authority controlled planning system had grown far more complex and expensive for small developers to navigate and was now set up to deal mainly with very large and well-resourced development companies.
In the early 1990s, he said, his first planning consent had cost £2000. “Today, that would cost me £200,000.” The situation was made worse by numerous factors including public sector cuts that had left planning departments struggling to hire and retain enough expert staff to deliver a swift and effective service to developers.
Marc Vlessing, Chief Executive of the developer Pocket Living, also argued that the UK’s planning rules were not prescriptive enough, which added to developers’ difficulties. In the Netherlands, he said, planning rules were highly prescriptive but if they did not specifically rule out a proposal, there was a presumption it could go ahead. In Britain, by contrast, there were far more grey areas allowing for individual discretion and negotiation.
Enabling small housebuilders to become competitive in a market dominated by a few large, long-established incumbents will require changes across numerous areas. Access to land could be improved if councils and other landowners were encouraged to act as “master developers”, panellists argued, while councils could choose to create openings for smaller property businesses through partnerships aimed at addressing specific areas of need such as rural housing supply.
To take opportunities such as these, small housebuilders will need easier access to additional sources of finance for development projects, particularly since the capital adequacy rules for banks imposed such a high charge on their development lending that many had largely withdrawn from funding small property developers. Removing imbalances in the UK’s system of tax incentives for investors in small companies, which put property companies at a structural disadvantage, would also help these companies to raise the much-needed equity they need to take on development projects.
Above all, however, panellists argued that the UK needed to make the political decision that it valued its smaller housebuilders and property developers, and was determined to create the conditions in which they can grow and challenge the entrenched position of the industry leaders.
With the support of LendInvest, Prospect hosted a roundtable discussion at the 2017 Conservative Party Conference on what can be done to support property SMEs to scale and how this could stimulate competition in the UK housing market.
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