We are awash with high-minded political ambitions at the moment. As with any pre-election build-up, our aspiring leaders lurch from pronouncement to pronouncement, trying to catch our imagination.
Electioneering is about selling a dream, hopefully one that a majority of voters share, and about selling a belief that we have found the man or woman who can deliver it.
Residential has received an overweight proportion of attention this time around and rightly so. The country’s housing supply challenges are enormous and a lack of affordable housing is cited consistently as a clear risk to future economic stability.
Although the attention is welcome, most industry practitioners look at the ambitious home construction targets as little more than fantasy. The rhetoric can feel pretty detached from the genuine solutions we expect and deserve from our future political leaders.
So here’s a thought. It certainly isn’t original, but it is a different “big idea” – one about small things.
Don’t forget about SMEs
Specifically, I’m on about the need – nay opportunity – to support small and medium-sized enterprises (SMEs) in the house building and development sector with the one big challenge they have faced since the downturn. Development finance has been pretty scarce, especially outside London. Post-downturn, the risks have been too great and many of the former mainstream lenders in this space have either exited or significantly downscaled their loan books. As a result, the number of SMEs (defined as those delivering less than 100 units per annum) has fallen from close to 6,000 at the top of the cycle to less than half that level today, according to the Home Builders Federation.
That’s not great news for sector employment, nor does it do much good for market competition and design innovation. In the context of solving the supply conundrum, this represents an annual loss of some 30,000 units from small sites, sites that are generally too small to be taken up by the PLCs. In terms of housing supply additionally, supporting the SME sector is one small idea that can have a big impact.
It pays to be big
Let’s look at the maths. A traditional development finance lender might seek 1-1.5% of a loan amount, on the basis of a 40% equity contribution towards total cost. The equity requirement is already a big problem for SMEs and might need to be bolted to additional security – including sometimes the family home or other personal assets.
However, the up-front costs of planning and professional fees do not float much with scale, meaning the hurdle rate to development for SMEs is higher and the risks larger. SMEs are also less likely to have the capacity to run multiple sites concurrently as the PLCs can do, spreading the uncertainty of planning risk and diverting resources to bolster any capacity gaps as needed.
Government could do much to simplify planning requirements for small schemes and perhaps offer pooled resources to be tapped for more complex projects. However as a recent NHBC survey pointed out, the central challenge facing SMEs consistently comes back to funding availability and onerous terms.
Thankfully, there appear to be a few white knights out there. In October 2014 Lloyds Bank announced that it had been exploring ways in which the SME sector could be further supported. Its recently announced Housing Growth Fund will invest £500,000 to £3m of equity alongside the SME house builder. Santander also appears to be looking at the space through its Breakthrough Growth Fund.
These are welcome moves and it is positive to see them coming from the banking industry. It is a personal hope that regardless of the blend of politics, post-election we see an earnest attempt to identify the pragmatic solutions to the UK housing crisis. And just sometimes – maybe it’s the small things that matter most.
Adam Challis is head of residential research at JLL
