There is a great deal of support for start-ups and entrepreneurs in many sectors but why isn’t this the case in real estate?
The government’s housing white paper issued in February made promises to help small and medium sized enterprises (SMEs) get back into building and get access to public land, recognising that a diversity of providers is needed to deliver the housing stock required to help solve the housing crisis. However there are a number of challenges to realising the full potential of the SME developer.
60% of new homes in the UK are delivered by a small number of big housebuilders and, whilst this is driving a large part of the country’s housing needs, the government is keen to supplement this with smaller, entrepreneurial housebuilders, as was the case when housebuilding was at its zenith in the pre- and mid-war periods. Homes England has made a commitment to support SMEs with a £1 billion development fund for developers building less than 100 units a year.
"SME activity in the sector is at a low level due to the barriers that face many developers, but this is particularly felt by the smaller organisations," explains Rebecca Wardle, Partner at Trowers & Hamlins. "Planning strategy is geared towards the larger builders with the money and experience and finding sites are expensive. The start-up costs are enormous and prohibitive, such as external bank finance. The appetite of lenders to fund SMEs is a challenge and finance at this level tends to be just too expensive."
While in central government there is the commitment to supporting SMEs, with Housing and Planning Minister Alok Sharma appealing for the "diversification of the housebuilding project", in the local authority and planning world that hasn’t trickled down. "One of the issues with the planning system is that it doesn’t make any allowances for SMEs and the smaller developments," says Tom Barton, Associate at Trowers & Hamlins. "The hurdles and hoops are largely the same whether you are delivering a 50 unit scheme or a 5,000 unit scheme. The difference being that your return is much lower. It’s also an issue of resource, SMEs don’t have the capability to prepare detailed documents and importantly drive applications through the system in the same way as larger organisation can."
Part of the problem lies in communication and awareness. Earlier in the year, Property Week reported Sir Edward Lister, Chairman of the Homes and Communities Agency commenting that "Parts of the country have no idea what their housing assessment is; they don’t have a local plan. That means developers don’t know where to go." David Cordery, Senior Associate at Trowers & Hamlins explained "Although large developers do have an advantage from a local authority perspective in that they have the ability to invest in public realm and improvements to the area – not just adding density, sites in less obvious locations could be overlooked."
"Enterprising SMEs, especially those with good local knowledge, need to make a success of sites that might pass under the noses of the larger developers."
Transport for London, with its renewed emphasis on making the most of its land assets, is appealing to SMEs as their land map has a variety of sites from small to big and they require a variety of partners. In a similar vein, local authorities could do more to encourage large developers to sign agreements with SMEs to develop small parcels of land on existing larger regeneration sites.
A good example of how this approach is working outside of London and the South East is Birmingham City Council, which has established its "Dynamic Portal" for registered approved SME builders. "This is a good system for them to get these contracts quickly and easily. This system could be replicated across more regions," says David.
"A positive step would be for local authorities to include more small sites in their development plan – this would provide more certainty for SMEs saving time and money and presenting a more acceptable risk" reckons Tom. "Permission in principle is a very positive step that has already been brought in with regard to brownfield development."
"It allows local authorities to give consent in principle, similar to an outline consent, which settles the fundamental principles of development such as use, location and amount of development for the brownfield site. All that then remains to be dealt with by an applicant is detailed design, and any mitigation matters such as contributions towards infrastructure. This gives developers a much level greater of certainty which is particularly valuable to SMEs who cannot afford to take on applications which may never result in consent."
Giving greater certainty in the form of pre application advice has been put into practice in North London. "Barnet partnered with a third party to fast track planning pre-applications which means that SMEs can reduce their risk in proceeding with a development. Pre application advice allows SMEs to determine if there is a viable development on a site and therefore whether to put in a full application or move on to the next site. The ability to get prompt responses from authorities, and not get bogged down in the planning system is invaluable."
While it’s positive that Homes England are flying the flag for SMEs, it’s clear that more needs to be done on a more granular level to support SMEs through planning and finance. With faster build out times, greater flexibility and an investment in locality, with the right support SMEs could be one way to help ease the housing crisis and the benefits of SMEs should not be overlooked.