£40bn of potential housing supply: why we need an SME house building revival
New research by Savills commissioned by LDS Sales Guarantees has revealed the current scale of delivery and pipeline of SME housebuilders sites.
The Savills report estimates that 370-550 small house led sites (equating to c. 9,000-14,000 new homes) are being delivered in England and Wales per year. It also reveals there are 136,000 homes yet to start construction or gain consent on small house led sites with an estimated development value of around £40bn.
In 1988, SME housebuilders built 39% of homes in England. This had dropped to just 12% by 2017, and even further to 10% by 2020, according to the Home Builders Federation. An estimated 22,060 new homes per year were delivered by SME housebuilders in 2019.
This drop is equivalent to the loss of at least 64,000 homes per year, compared to if SME housebuilders were still delivering 39% of housing supply. The gross development value of these lost 64,000 homes is £20bn.
Analysis shows that LDS Sales Guarantees increases access to debt and reduces developer equity requirements by around 77%, therefore enabling SME housebuilders to create 3 to 4 times more housing output with the same equity than via traditional financing routes.
Boosting current SME housebuilding figures by these multiples could bring forward up to 77,210 homes in total – including 55,000 extra new homes – with a total development value of £24bn each year, most of which would be net additional to housing supply.
Further analysis by former HM Treasury and MHCLG economist, Chris Walker, shows that these 55,000 homes would support more than £12.9bn in gross value added (GVA) per year, of which at least half would be net additional to the economy.
These homes would also support nearly 200,000 jobs in the construction industry and its supply chain, of which at least half are net additional to the economy.
The chairman of Homes England, Peter Freeman, has named boosting SME housing supply one of his top ten priorities.
If SMEs delivered an extra 55,150 homes per year, it would bring the government closer to achieving its target of building 300,000 new homes per year by the mid-2020s, as most SME homes would be net additional to housing supply. MHCLG stats revealed 243,770 homes were delivered in 2019/20.
Last year, the Housing Minister Christopher Pincher, said: “SMEs have a key part to play by increasing their output, as the biggest home builders in our country will not meet the Government’s housing building target alone.”
All housebuilders face barriers which prevent them from delivering new homes, including the availability of sites and the planning process. The research from Savills highlights that, even with available sites and planning, SME housebuilders are still unable to fulfil their potential.
For SME housebuilders, financial viability is a key part of the problem which is preventing the construction of new homes.
In January 2021, LDS launched a new Proptech engine enabling SME housebuilders to obtain instant sales guarantee proposals. The research paper explored the potential impact of LDS Sales Guarantees on the SME housebuilding market. LDS Sales Guarantees underwrite the financing of development sites, guaranteeing that SME housebuilders can call on LDS to complete on any unsold homes.
LDS Sales Guarantees remove major barriers of pricing and demand risk, opening up access to finance and completely transforming the viability of sites for developers and lenders.
Chris Walker, a former Treasury economist and MHCLG senior economic advisor, said: “The proportion of homes being constructed by SME housebuilders has dropped steeply over the past three decades.
“This new analysis shows that development finance is a significant barrier for SME housebuilders which is reflected by the fact that SME housebuilders are unable to deliver the homes they already have planning permission for.
“The LDS Sales Guarantee approach could help unblock this development finance barrier enabling SMEs to build thousands of extra new homes. Crucially, most of these would be net additional to the nation’s housing supply creating much-needed new homes for people.”
This need to transform financial viability for SMEs is demonstrated by the fact that since its launch, over £1.5bn of LDS Sales Guarantee proposals have been issued.
Mark Hawthorn, CEO of LDS Sales Guarantees, said: “Obtaining planning permission isn’t the only obstacle to building homes even though it is the most focussed on.
“Research by the Local Government Association revealed that more than 1m homes in England have planning permission but are yet to start construction.
“A major factor preventing additional housebuilding is the decline of SME housebuilders.
“We commissioned this research to show that the decline of SME housebuilders has been driven by a number of factors, a very significant one being the ability to access development finance on viable terms. We’re committed to working closely with SMEs and the supply chain to fully understand the challenges, and will be carrying out ongoing research to inform our product development and to ensure we can help them overcome the hurdles.
“By guaranteeing to buy homes built by SME housebuilders, we are proving that we can transform the financial viability of SME housebuilding and enable them to build thousands more homes every year.”
Lucy Greenwood, director, Residential Research and Consultancy at Savills said: “SME housebuilders have faced a number of challenges in recent decades, but there is positivity in the market. The potential is there for SMEs to increase their output, if more can be done to help them deliver the additional homes. Unblocking the finance barrier is a key step that will help enable this growth.”
Rosemary Davenport, spokesperson at Homes England, said: “Following the financial crash there was a huge decline in the number of SMEs operating in the market, with the industry becoming increasingly dependent on a small number of big housebuilders. Whilst these play an important role, they cannot construct the homes the country needs alone and their dominant position can result in reduced consumer choice and the slower build out of sites. This report illustrates why we’re determined to remove the barriers SMEs face; freeing them up to get building, and creating a more resilient and competitive market.”
Stuart Law, CEO of the Assetz group, said: “Savills’ research identifies a massive £40bn worth of potential development value that SME housebuilders could unlock with the right support. Not only could this prove game-changing in light of the nation’s ongoing housing crisis, but it would also have broader ramifications for the UK’s economic health by providing a boost for sub-contracted suppliers and other property professionals, as well as feeding into new job creation.
“However, the right support will be key to unlocking this opportunity. With SME housebuilders continuing to face difficulties securing financial support through more traditional routes, alternative lenders such as Assetz with specialist understanding of the specific requirements and challenges such businesses face will be absolutely vital to enabling them to capitalise on the opportunity. Since 2018, Assetz Capital has funded in the region of 1 in 12 new-build homes produced by SME developers and intends to increase this share moving forward.
“This, paired with the brilliant innovation from LDS in mitigating sales risk and releasing an element of developer capital upfront, will enable SME housebuilders to leverage the prospects outlined in Savills’ report and, ultimately, better support the nation’s housing needs.”
Roxana Mohammadian-Molina, chief strategy officer at BLEND Network, commented: “This landmark report highlights some of the key issues faced by SME housebuilders and goes a long way towards identifying viable and practical solutions to be able to support this sector, which constitutes the backbone of the UK economy. Back in the 1980’s, 4 out of every 10 homes built in the UK were being built by SME builders and small construction companies, compared with less than 1 in 10 today. Availability and terms of financing are clearly a key issue faced by SME housebuilders as banks and traditional lenders no longer have the appetite – or the capacity – to provide development finance to SME housebuilders. However, it is very exciting to now see regulated specialist development finance lenders who have demonstrated that they can and must be part of the solution if we are serious about tackling the UK’s housing crisis.
“Ultimately, tackling the UK’s housing crisis requires a coherent overarching lending strategy so that funding can be unlocked to allow to build the homes the country needs. Regulated specialist development finance lenders, through partnerships with LDS and products that effectively de-risk the exit for SME housebuilders, must be brought into the fold to help tackle the housing crisis.”
Shahil Kotecha, CEO of Pivot, said: “Savills’ research report on the size of the housebuilder market identifies 3 key factors contributing to a dwindling population of SME developers: Availability of land; access to finance and supply chain confidence. Whilst the GFC has impacted lender attitudes and availability of development finance from traditional lenders, there has at the same time been a large increase in the availability of Real Estate debt finance from the non-bank lending sector, which in turn is alleviating some of this pressure. Whilst there are no official regulatory returns or data published on the size of this market, analysts regularly estimate the non-bank property sector to be £4-5Bn.
“However, as correctly identified by the report, the ability to not only obtain this finance but to attain it with competitive terms ‘is crucial to the expansion of SMEs’. Larger housebuilders have traditional had the capital reserves required by these non-traditional debt providers to support their lending appetites, leaving SMEs locked out by these forms of finance too.
“LDS’ sales guarantee unlocks this equity gap, reducing SME developers’ equity requirements by around 77%. This in turn means that their leverage requirements are reduced, increasing the lenders they have access to and the products available to them.”