COMMENT: Speak to Berkeley chief Tony Pidgley or Redrow chairman Steve Morgan, the UK’s housebuilding kings, and they will probably tell you they could never have successfully launched their companies today, says Steve Cook, deal origination, Investec.
Pidgley has grown the Berkeley Group into Britain’s most-admired residential developer with a stock market capitalisation of £5bn-plus, while Morgan has taken Redrow from its Northern roots to a nationwide outfit worth £2.4bn.
Yet both argue convincingly that if they were starting out now there would be too many obstacles in their way. That’s a big problem for UK plc, because Britain needs a wider range of housebuilders than the big boys who have increased their influence over the past 30 years.
The Home Builders Federation concedes that the number of smaller housebuilders, defined as building 100 units or fewer a year, peaked in 1988 at around 12,200 firms but dropped to around 2,400 by 2014.
And without a wider range of builders there is little hope that national housing demand, which is established as at least 250,000 new homes a year, can be met, with volume housebuilders averse to risk with shareholder interests in mind never likely to approach this rate of construction.
There are a whole series of issues at play.
First, since the global financial crisis, smaller builders have had increasing difficulties in accessing finance, with many of Britain’s biggest banks still reluctant to lend generously against any consented property development, let alone land acquisition – especially to smaller builders.
Next – and to Morgan’s chagrin in particular – the pressures placed on small builders by the planning system are too much for many of them to handle.
If they have persuaded a bank to lend to them, the small builder will next have to negotiate a further series of hurdles:
- First, they will have to commission several costly survey reports
- They will then, in all likelihood, have to wait nine months before securing planning consent to develop that land, without any guarantee of success
- While attempting to win consent they will be confronted by a poorly staffed and inefficient system – characterised by local politics and delays – which leaves many a small developer in peril and out of pocket if a decision goes against them.
Even the biggest builders, such as Taylor Wimpey, acknowledge that the planning system piles on risk, so what hope do smaller operators have? And after the principle of a planning consent is agreed, payments for local infrastructure called Section 106 agreements next have to be made.
It’s hard enough for small builders to buy sites in the first place. The public sector tends to bundle large sites together, or favours selling bigger sites, to raise much-needed capital receipts.
Smaller, infill sites often sit neglected for years because owners find the sale process itself expensive and convoluted, and would rather retain their ownership as land values gradually appreciate.
Larger builders have steadier access to materials and labour, and with Britain due to leave the European Union there are growing fears among smaller builders that they will suffer more from labour shortages more than the big boys.
So what are the answers? How can we spread the load of easing the housing crisis more evenly among Britain’s builders, big and small?
Firstly, local authorities could take a more active role in development.
Rather than selling sites to the highest bidders they could play more of a coordinating role, commissioning smaller contractors to build their own housing-led developments rather than simply selling off sites.
Next, a reduction in stamp duty or a review of stamp duty bands by the Chancellor in his Budget would also help smaller builders.
The Adam Smith Institute has released new research which says increased rates of stamp duty are “gumming up” the housing market – so why not abolish it for all first-time buyers?
This would increase all housing development volumes, with smaller builders inevitably providing some of the extra capacity needed.
And finally, Britain’s banks need to step up to the plate. With interest rates rising again, another headache has been added to the entrepreneur developers and builders who now have so much on their plate.
At Investec we are happy to lend to entrepreneurs and smaller developers with a good, strong track record.
Will others rise to the challenge as well?
