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Property Week Insight: SME housebuilders need backing

March 19

4 min read

This week Rowland Thomas, MD at Close Brothers Property Finance was featured in Property Week magazine talking about how SME housebuilders play a crucial role in supporting economic growth and how they need more support to do what they do best, build more houses.

Taken from Property Week Insight, published on Wednesday 13th March 2024.

Close Brothers Property Finance recently hit a significant milestone: the number of new homes built by small and medium housebuilders financed by our team rose from 10% to 14% of the market in the space of just 12 months.

On the face of it, this would appear to be a cause for celebration – an ideal way to round off 2023. However, the sad reality is that we have not accomplished this purely through increasing our loan book. Instead, the overall market has contracted to such a degree that our share of it has risen by default. This country desperately needs new houses to be built, but the regulatory landscape, high interest rate environment and creaking planning system have taken an enormous toll on the sector.

Data from the Department for Levelling Up, Housing and Communities shows the number of new homes registered in Q3 2023 by building control fell by 68% compared with the previous quarter, down 52% compared with the same quarter of 2022. This drop in new homes being built has been widely reported, with many of the largest housebuilders in the country announcing plans to cut back significantly on investment in developments.

Last year, FTSE 250 developers reported a slump of nearly 50% in sales of new builds, with many subsequently issuing profit warnings. If some of the industry’s largest, well-capitalised players are struggling in the current economic climate, imagine how their smaller counterparts are faring. Unlike for a Persimmon or Barratt, cutting dividends to shore up their balance sheets isn’t an option. Instead, they are more likely to cut back on construction, resulting in job losses and missed revenue for local authorities and communities. The possible merger between Barratt and Redrow will only widen the gulf in the market to the detriment of SMEs.

Supporting the housebuilding industry needs to be a priority if Britain’s economy is to thrive again

One of the biggest differentiators between large and small housebuilders is their ability to navigate challenges posed by our cumbersome and extremely overburdened planning system. Major housebuilders usually have a large number of developments on the go. If they run into delays with one site on account of planning hold-ups, they can divert resources into another. This is a luxury small housebuilders simply don’t have.

Close Brothers is proud to have established the annual State of Play Report, along with the Home Builders Federation and Travis Perkins, which gives SME housebuilders a platform to share the biggest challenges faced by their business. Now in its fourth year, the report has consistently shown that the planning system presents the biggest hurdle to the sector, both in terms of delays and the costs of securing planning permission.

On 8 December, planning application fees for major developments in England rose by 35%, with a 25% uplift for all other developments. While nobody would argue that planning departments are not in urgent need of extra resources, SMEs are hardly in a position to shoulder additional cost burdens.

Home stretch: supporting the housebuilding sector needs to be a priority for all political parties

What’s more, the additional fees aren’t ringfenced, so there is no guarantee that the planning system will be improved. And it remains to be seen whether cutting the planning guarantee from 26 to 16 weeks will actually speed up processing times,.

This is no ordinary year – it’s an election year, and supporting the housebuilding industry needs to be a priority for all political parties if Britain’s economy is to thrive again. We hope the present government prioritises easing constraints both on the supply and demand sides, as the end of the Help to Buy scheme and high interest rates have affected affordability for many prospective buyers. Greater certainty regarding environmental regulations, such as nutrient neutrality, would also give SMEs confidence to get back to building more houses.

Helping SME housebuilders is important not only for increasing housing supply, but also for diversifying the housing market and ensuring the homes that are developed are tailored to the needs of local communities.

SME housebuilders also play a crucial role in fostering economic growth, through job creation including apprenticeships and by supporting local materials suppliers. By continuing to shine the spotlight on the challenges they face, we at Close Brothers hope we can help effect meaningful change – even if that means our market share drops back to 10%.

Connect with Rowland on LinkedIn here

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