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Smaller Home Builders In The Uk: How Can They Help Fix The Housing Shortage?
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Several factors have diminished the role of smaller builders and developers in building British homes. To find solutions, it helps to understand the problem.
Shadow housing minister Emma Reynolds has long been an advocate for increasing the housing supply, particularly because it will make housing more affordable for those at the lower end of the economic spectrum. She is also well versed in housing and house building history, having recently emphasised the greatly diminished role of small- and medium-sized house builders (SME builders).
Reynolds rightly notes that in the 1980s SME builders were responsible for 80 per cent of home construction, a time when more houses were being built than are today in the face of England’s burgeoning population growth. Even as late as 1995, firms that built between 1 and 100 homes were credited with 25 per cent of homes; today, that portion is closer to 12 per cent.
What happened to smaller and medium-sized home builders? Several things:
Access to finance is limited - Larger developers who work at greater scale (100+ homes per development) have access to capital through such entities as real asset fund as well as bonds. Developments in smaller towns and in urban infill sites aren’t of a scale to attract such investors at a time, post-financial crisis of 2008, when lenders are nervous about lending to small businesses of all kinds. Consequently, SMEs have to pay higher interest rates or sacrifice equity to private investors.
Planning processes expensive - Even as larger-scale developments are dependent on planning permission specialists who work to exploit capital growth land land opportunities, so too must smaller builder-developers achieve approvals for small sites – sans the expertise and options that larger developers have. Larger developers also have economies of scale that amortise costs over many more homes and plots, while a smaller builder might spend as much as £50,000 for a single small-site application.
Public land procurement is unwieldy - About 40 per cent of developable sites, as well as 27 per cent of brownfield land that is suitable for housing, is publicly owned. To satisfy transparency requirements of the sale to private interests, the administrative tasks required to be a buyer are a disproportionately larger burden on smaller builders.
The Government has acted to help smaller builders, most notably with the £500 million Get Britain Building scheme and the £325 million Builders Finance Fund. The former provides equity investments to smaller residential schemes (under £12 million) while the BFF is focused on stalled housing schemes of 15 to 250 units. The Confederation of British Industry (CBI), the voice of business, looks at the challenges to SMEs and recommends increasing affordable housing capital investment (currently at £6.5 billion) at the expense of housing benefit welfare payments (currently at £24 billion). The business organisation also recommends that alternative sources of financing such as retail bonds or government-guaranteed lending be made available to SMEs.
Another solution provided by the Government - but concerning to environmentalists - is how the Government has relaxed the zero-carbon homes requirement, set to take effect in 2016 for all new construction. Recognising that this goal is unachievable in some buildings, it offered two allowances. One is that where not achievable on-site, a developer could employ “allowable solutions,” which often means implementing a commensurate carbon reduction in another project such as a building retrofit. For smaller developers, any project of 10 residences or less is exempt from the requirement. But as some have noted, that means those homes will be more expensive to operate for decades to come because more fuel will be required to heat them.
For the time being, larger-scale developments will continue to draw the lion’s share of investment money and build the developments with the most homes. But few will argue against using many initiatives from multiple sectors to make up the national shortfall of homes.
Individuals and institutions are increasingly drawn to the housing sector in the UK as a smart investment strategy. But choosing the right vehicles for every situation requires an independent financial advisor, particularly for individuals.
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