"Macroeconomic shocks caused by Brexit, the pandemic, supply chain shortages, soaring inflation and interest rates have hit the sector hard, decreasing lender willingness and creating labour shortages as well as shipping delays."
Over the years, SME developers have played a pivotal role in delivering the UK’s housing stock. These developers are those that deliver anywhere between 1 and 1,000 homes per year. However, over recent years, their prevalence as a contributor to the UK housing market has significantly diminished.
A House of Lords report recently confirmed as much, reporting that in 1988 SME housebuilders were responsible for 39% of homes but in 2020 that figure stood at only 10%.
Hit by successive recessions, severe planning system flaws and difficulties in accessing finance, small to medium-sized housebuilders face serious disadvantages and the social and economic consequences of this issue are far-reaching.
At a time when chronic housing shortage is one of the biggest challenges facing the country, we have got to get SME housebuilders building again. But before that can begin, there is an urgent need to address the systemic challenges facing their businesses.
What’s holding back SME housebuilders?
With the hegemony of large-scale developers so ingrained in the UK housing market, accessing finance has become increasingly difficult for SME housebuilders. In fact, the scale of the challenge is so great that MPs have launched an inquiry to understand it further.
In addition, building costs have soared, now 23% more expensive than in 2020 – the largest jump in over 30 years. Critics will argue that this is reflective of the price of homes, which is indeed true, but for SME housebuilders, who do not typically have access to large reserves of cash, the sudden jump in costs can mean the end of housebuilding projects. The alternative is to find fresh funding but, as we have established, this is difficult to come by.
Furthermore, macroeconomic shocks caused by Brexit, the pandemic, supply chain shortages, soaring inflation and interest rates have hit the sector hard, decreasing lender willingness and creating labour shortages as well as shipping delays. All of these factors make building more expensive, raising costs at a time of rising overheads.
Despite these immense challenges, in the most recent Spring Statement, there was not a whisper of support for SME Housebuilders.
Of course, at the heart of all of this is the low availability of buildable sites. The planning system is cripplingly slow; applications often take years until reaching the committee stage. Meanwhile, with planning largely devolved to local government, many councillors face loud nimbly-led pressures which threaten job security and discourage local building.
That is not to say that public representatives should not make their decisions based on the will of their electorate. However, we must recognise that it has become increasingly hard to satisfy both the national need for housing against local protectionism, which often calls for local development to never exceed the height of buildings created in the 1800s and to keep populations stagnant.
It is, therefore, no surprise that our decentralised planning system has failed to deliver the housing the nation needs. Though, equally, the revolving door of housing ministers – 15 over the past 13 years – demonstrates a lack of commitment by the government to seriously grapple with the issue.
Peer-to-peer lending – a new way for SME Housebuilders to raise finance?
Despite the lack of meaningful government intervention, the rise of peer-to-peer finance has emerged as an effective way of plugging the financing gap.
In the property market, this has been particularly compelling because it has supplied fresh channels of finance, allowing builders to access capital that has become increasingly directed toward large-scale developers.
Moreover, as the physical scale of projects increases, developers may find costs have exceeded their initial start-of-project value, which effectively prevents smaller players from scaling up proposals; peer-to-peer finance has offered SME housebuilders an effective option to raise capital at such times.
In addition, it has allowed ordinary investors to participate in institutional-grade real estate investment opportunities.
Sustaining the plurality of the development sector is critical if we are to ever make progress in fixing the UK’s broken housing market. But doing so will require a holistic approach and decisive action to address the barriers that are standing in the way of small and medium-scale housebuilding.
Only then will we manage to tip the scale in favour of smaller players and help them carve out their space in today’s unforgiving market.