SME Housebuilders: How Will They Cope?  Ricky Prota June 14, 2024

SME Housebuilders: How Will They Cope? 

It’s no secret that SME housebuilders have been plagued by obstacles in recent years. Geopolitical and supply chain issues, changing regulations, inflation, and labour shortages have compounded, making it difficult for many of these businesses to stay afloat. 

Is there a light at the end of the tunnel? How can struggling companies pull through these difficult times? This article attempts to answer these questions. 

Current Challenges Facing SME Housebuilders

Again, there are numerous challenges facing these companies, but many agree on what the main culprits are. One survey revealed that 55% of SME developers agree planning is the main constraint; 51% also considered restricted mortgage availability to be a major obstacle. 

Other difficulties included a lack of available and viable land (48%), followed by material costs (43%), lack of finance to the company (42%), and lack of skilled workers (34%). 

Participants also stated that costs caused by various regulations were a problem, including the Community Infrastructure Levy (25%) and Section 106 agreements (18%). A mere 1% of participants said they were facing no constraints.

As well as the above regulations, the new building safety levies present another obstacle that will disproportionately affect SMEs in both England and Scotland. 

What Planning Issues Are Affecting SME Developers?

The State of Play Report by the Home Builders Federation, Close Brothers Property Finance and Travis Perkins plc shows even greater consensus on the role planning has, with 93% of SMEs stating that delays in securing planning permission is a significant barrier to growth. 

Other issues raised included the cost of obtaining planning permission, which 46% said had risen by more than 30% in the past three years – and that’s without considering the planning fees introduced in December. (While application fees for major developments increased by 35%, all other application fees increased by 25%, which is problematic for many small developers). 

Another issue is that local authority planning departments are under-resourced, which 91% of SME developers believe is restricting their growth. (72% also cited interest rates as a major obstacle.)

To be more specific about what the problems with the planning system are, we’ll look at the results of a government study into the housebuilding market. 

Unpredictability

Uncertainties in the planning system, stemming from factors like frequent policy changes, outdated local plans, and political/public attitudes towards development, increase the risks and uncertainties about the viability of obtaining planning permission and achieving a return on investment. 

Cost, Length, and Complexity of the Planning Process

The planning process has become increasingly lengthy, complex, and costly. The study reveals that the time taken to make a major dwelling planning decision has risen significantly; in 2009, 50% of decisions were made within 13 weeks and in 2021, only 10% were made within this timeframe. 

In fact, the average time taken to make planning decisions in England in 2021 was more than a year; in Scotland, the average for comparable decisions was more than 39 weeks and in Wales, around 28 weeks. 

These increases are due to the rising volume of evidence required. As for the expenses involved, higher application costs and additional policy-related costs imposed by new regulations such as Biodiversity Net Gain and the Future Homes Standard contribute. 

These factors further threaten the financial viability of developments, leading to potential delays and even deterrence from pursuing planning applications, especially for larger sites that require more substantial upfront investment.

Insufficient Clarity, Consistency, and Strength of LPA Targets and Objectives 

There is a lack of clear and consistent local planning authority (LPA) targets and objectives, which creates uncertainty around land allocation. This can affect the volume of planning applications approved and the overall effectiveness of the planning system in meeting housing needs. 

The constraints placed on LPAs by geographic limitations or the presence of greenbelt land also contribute to the challenges in meeting housing targets.

The Consequences

All of the issues above not only hinder the efficiency and output of the planning system but also disproportionately affect smaller developers, who face higher per-plot costs and greater challenges in managing the uncertainties and financial burdens of the planning system.

Data from HBF reveals the impacts that these various challenges have had on developers: 

  • There are around 85% fewer small housebuilders today than there were a generation ago. 
  • Of 202 SME housebuilders surveyed, 87% were considering stopping residential construction within the next three years. 
  • 78% plan to reduce investment significantly. 
  • 93% are considering scaling back their operations or changing direction in order to survive. 
How Will SME Housebuilders Cope? 
Planning Reforms

In February, the government announced plans to ensure that all local authorities in England prioritise brownfield developments

More flexibility will also be required of them when it comes to applying policies that would usually prevent building on these areas. The government will also be raising the bar as to the refusal of plans for brownfield developments (in 20 of the largest cities and towns where housebuilding targets are not being met). 

The State of Play report suggests that planning departments should receive more funding, while a simplified planning process for smaller sites should be introduced. 

Combating Labour Shortages

The report recommends the following changes to tackle this challenges: 

  • The Apprenticeship Levy rules should be changed, better enabling SMEs to train new entrants.
  • The administration of new hires should be the responsibility of the company that receives the levy transfer. 
  • Level 2 T-Level style qualifications that enable a route into housebuilding should be introduced. 
  • Current apprenticeship schemes should emphasise practical skills and should address sustainability-related skills. 
Other Possibilities 

Other possible solutions include automatically granting permission on brownfield sites for plans that meet the minimum ESG requirements, as well as removing the restrictions on conversion projects. 

SMEs that are still in business may have secured funding from private lenders or challenger banks, and more companies will need to employ this strategy. 

In addition, Homes England recently announced a new scheme where SME housebuilders can apply for development loans from £250,000 to £10 million (and potentially more). 

This so-called Levelling Up Home Building Fund can provide finance where planning permissions has already been granted. It can also be used for community-led housing projects, serviced custom-build and self-build plots, and off-site manufacturing.

Conclusion 

In summary, the major obstacles facing SME housebuilders include the planning system, securing financing, material costs, and labour shortages, with planning being the most significant hurdle for many. 

Potential reforms to the planning system would likely be the most beneficial change for small developers so that they don’t have to go through the same lengthy, complex process as larger companies. 

In the meantime, the Levelling Up Home Building Fund may help those that are struggling with financing projects whose plans have already been approved. Hopefully, this will make a big difference for many SMEs throughout the country that are facing uncertainty. 

At SDS, we offer market leading software for developers, including viability, land valuation and project management solutions. We also offer consultancy services on appraisals, viability, and more. To enquire or request a demo, contact us today. 

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