Smaller Home Builders in the UK: How Can They Help Fix the Housing Shortage?

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.

Might Modular Housing be England’s Next New Home Building Method?

Offsite-built homes are more energy efficient and less costly to build than traditionally constructed houses. They could help solve the housing crisis faster.

“Modular housing” created a bad name for offsite-manufactured homes and building components in the post-war period, probably because most were intended to be temporary in nature. But in the 21st century, this type of residential building, sometimes called “flat-pack” homes, is in some ways superior in quality and might be the answer to Britain’s housing shortage.

The advantage largely lies in how modular homes can be built to higher energy-efficiency standards than those houses built onsite. Additionally, offsite-built homes will cost up to 25 per cent less than on-site construction. In the UK, such homes have gotten more attention recently because of these environmental and cost benefits, and also as a means of expediting building that might alleviate the housing crisis.

Typically, modular homes are detached houses accommodating one family, very often in the “self-build” category where the owner first acquires land in a rural or suburban area and then purchases the building components. In 2005, however, the industry was given a boost by the successful multi-storey, multi-unit Raines Court modular building located in Stoke Newington, London.

This suggests that larger-scale developments might be ripe for flat-pack housing. The accelerated means by which the country can build the 240,000 or more homes per year - versus the 140,000 being built today - is when investors in joint venture land funds buy several hectares of land. They will seek planning permission, develop infrastructure (roads and utilities) and then sell parcels to homebuilders who in turn build homes. The second part of this equation, the construction of homes, would be shorter when most of the building occurs offsite.

The Institution of Mechanical Engineers (IME) addressed this by publishing a report in 2015, “UK House Building, manufacturing affordable quality homes.” The IME makes just this case: “there is therefore an urgent and pressing need to substantially increase the number of new homes being built on an annual basis,” the report authors write, adding “not only does the number of new dwellings need to increase, so does the quality of their construction.”

The report goes on to express that home building companies are not sufficiently incentivised by regulations and economics to build larger and more energy efficient homes (the square-metres-per-person statistics for England are the lowest in Western Europe). Alternatively, off-site construction is urged by the IME for its several benefits:

• Shorter build times - Said to be less than half of conventional masonry construction.

• Superior quality - Because of factory-based design standardisation, precision engineering and quality control are exemplary.

• Energy efficiency - Due to superior thermal insulation, resulting in 20 per cent lower energy consumption for occupants.

• Less construction waste - Factory efficiencies result in 90 per cent less refuse.

• Lower cost of ownership - Due to reduced construction and operating costs.

• Reduced transport in construction - Lower fuel consumption in transporting raw materials to a centralised factory instead of the home site.

For investors in property fund management schemes - the financing behind buying land that achieves planning permission - these efficiencies do not directly affect the value increase in their funds and the developments they are engaged in. By and large their involvement ends with basic infrastructure on sites that are then sold to homebuilders. But if there is faster delivery on higher-quality, energy-efficient homes, that might enable more developments overall to be built. As of 2015, a construction labour shortage has stymied some building (many skilled construction workers left the industry as a result of the financial crisis that began in 2008).

IME calls for policy changes by the Government to support the still-relatively-small modular housing industry. First, the organisation supports investment in off-site construction technologies as a means of creating jobs (it bears noting that jobs would be diminished for construction firms that do on-site construction). Second, IME is critical of Whitehall’s wind-down of the 2016 Zero Carbon standard, exempting developments of 10 units or less from the energy-performance regulation. Third, it recommends a programme (and funding) to encourage diversification of the housing supply to favour self-builders, local authorities and housing associations in building different types of homes.

UK investors should always be keen to support new land investment schemes, new technologies and new methods for meeting market demand. The housing shortage certainly attracts investment to the sector, but an independent financial advisor should be consulted to ensure the investment provides the appropriate risk for the investor.

How Does Chancellor Osborne Plan to Fix the Economy with Housing?

Housing is in the matrix of economic activities that make for a stable and prosperous Britain. The homes shortage can be fixed with policy and investment.

Chancellor of the Exchequer George Osborne published a presentation to Parliament in July 2015 that outlines his ideas for stimulating the British economy. Titled “Fixing the foundations: Creating a more prosperous nation,” in it Osborne speaks of the drivers of productivity: “A dynamic, open, enterprising economy supported by long-term public and private investment in infrastructure, skills and science.”

No small part of this plan is what the UK does to ensure adequate and good quality housing. Fixing the foundations states as a premise that the country has fallen behind in building residences to accommodate a growing population. Osborne reads this as bad for people, but also bad for business: it “harms productivity and restricts labour market flexibility, and it frustrates the ambitions of thousands of people who would like to own their own home,” reads the report.

This is a critical consideration to investors who want to build new homes. Strategic land developers must work with local planning authorities to get permission to build; what comes out of Whitehall can influence councils at the local level. As anyone who has been through this development process will attest, it is not a cakewalk.

Osborne’s plan to increase housing as an economic stimulus comes in five pieces, fundamentally serving the need to provide homes that people can afford close to where they want to work:

Develop a zonal system for brownfield sites - In effect, it would grant automatic permission to build on suitable land that has fallen into redundancy.

Enforce requirements that local authorities develop their own local plans - Surprisingly, about half of the local councils lack a plan called for in the National Planning Policy Framework, which since 2013 has required each council to outline where new homes can be built. Osborne says “the Government will publish league tables, setting out local authorities’ progress on providing a plan for the jobs and homes needed locally.” Where local authorities fall short, the Secretary of State for Communities and Local Government will consult with local people in an intervention to arrange for writing local plans.

Encourage strong and fair compulsory purchase powers - This is a devolution of power to planners in London and Manchester. According to the document, the intention is “to bring forward more brownfield land for development by making the compulsory purchase regime clearer, faster and fairer for all parties.”

Support first time buyers - Provide 200,000 Starter Homes built by 2020, and extend Right to Buy to housing association tenants. Starter Homes will first be built on underused brownfield land; residential-unviable land can be used for retail, leisure and institutional uses.

Alter the tax structure for landlords - Under the current system landlords have the advantage of being able to deduct costs when calculating the tax they pay on their rental income - they still enjoy Mortgage Interest Relief that homeowners lost 15 years ago. Osborne proposes that this relief should be restricted and will be phased in over three years beginning April 2017, shifting the balance between landlords and homeowners.

The fact that Osborne stresses the work-home proximity factor is worth noting to those involved in alternative land investments. The proposal notes that labour market inflexibility is frustrating to employers as much as to workers. He remains critical of the strict planning system, even after the reforms begun in 2011, because it increases the costs and uncertainties in investments. Only better-managed strategic land investors understand how to navigate the system in such ways that a profit can be extracted from the enterprise.

Osborne does acknowledge the planning system has improved, that housing starts are at a seven-year high, and that government programmes such as Help to Buy have put 100,000 households onto the housing ladder. For those who invest in land for the purpose of development, this is encouraging.

Investors should always consult with an independent financial advisor to fully understand the implications of alternative assets and their risks. Investment in UK land and property can be lucrative, but the experience of the specialists managing the development or related funds needs to be considered as well.

Has Localism Failed? Osborne Gets Tough on Local Planning Authorities

The post-election proposals from the Conservative Government seem to buck the trend of the 2011 Localism Act. Local councils need to move faster.

David Cameron announced in September 2015 that planning permission would be streamlined with preapprovals for selling off publicly owned lands to housing developers. While a marked departure from standard planning processes, it should come as little surprise to those in the business of housebuilding. It appears the Conservative government is losing its patience with local councils.

“Is it not time to cut out the middleman?,” Cameron asked in a keynote speech covered by InsideHousing.co.uk “Should government not just contract out development on this land and get building on it straight away?”

This is just one sign among many that central Government is growing impatient with local planning authorities (LPAs) and their respective councils over a collective failure to provide for sufficient house building. The country has a critical shortage of homes, building under 140,000 residential units (flats, terraced, detached, etc.) per year when something closer to 250,000 homes each year for the next decade are needed to bring supply into balance with demand.

Investors engaged with property fund managers know the challenges of getting use permission. In their quest to turn unused land into housing, the LPAs have to be assured the new development will not place undue burden on the existing community infrastructure, or that the developers will provide necessary funding (through Section 106 payments or Community Investment Levies) to cover that concern.

Local councils have been asked under the requirements of the National Planning Policy Framework to produce five-year plans, projecting where and how new homes can and should be built in their communities. About half have complied as of mid-2015. The remainder, in addition to being out of compliance, then are subject to the interests of developers with no sense of a master strategy.

Cameron’s Chancellor, George Osborne, has proposed from London several additional changes to the planning system that further undermines the idea of localism. Chief among them is how the Government should intervene to draft local plans when the local authorities fail to do so themselves. Other changes include:

• Penalties to local authorities who make 50 per cent or fewer planning decisions on time.

• No planning approval necessary within a new “zonal” system that applies to suitable (residential-worthy) brownfield sites. Additionally, mayors of London and Manchester are granted stronger compulsory purchase powers to bring forward more brownfield land for development.

• Major infrastructure projects that include elements of housing will be fast-tracked through the Nationally Significant Infrastructure regime (not required to go through full democratic consultation).

• Residential property owners in London are allowed to add up to two storeys to their structures to accommodate additional homes (one restriction is that the addition not be taller than an adjoining neighbour).

This should provide encouragement to private financiers engaged in alternative investments. The lure of the high demand for housing is increasingly attractive as an investment, however some who are new to real property find the planning approval process to be off-putting. With streamlined systems in place and becoming less bureaucratic, such worries are diminished.

Investing in housing or other forms of real estate, land, property - and market-traded equities relating to these - comes with nuance and complexity. Individuals are advised to discuss it with an independent financial advisor.

Does the UK Tax Regime Distort the Housing Market?

Part of how cities and towns accept new housing is through improvements in nearby infrastructure. But how that is assessed fairly is subject to debate.

The UK’s housing shortage problem is one with arguably many causes. Some trace it back to Thatcherism, selling off council housing without guaranteeing that affordable housing would be built to take its place. Others say the planning system, the preservation of green fields, tight financing rules, and the Great Recession of 2008-2010 (and later) all shook out buyers as well as builders.

Now with a resurgent economy, investors involved in strategic land development are betting on building and selling more houses to a country that clearly demands them. They work through and past the planning authorities, select homebuilders to construct houses, and they generally do well when a development is complete. But there still are certain stymying issues.

A good case can be made for the market distortions that some tax structures cause. One example of this is how the Stamp Duty Land Tax (SDLT) affects the price and liquidity of home ownership. On a home valued at under £125,000, there is no tax but until December 2014 there were incremental jumps to a 2% tax (£125,001 to £250,000), 5% tax (£150,000 to £925,000) on up to 12% for homes valued at £1.5 million on up. Those abrupt jumps created artificial reasons for holding down prices and therefore the types of homes that were built were often done so to stay below a SDLT threshold. Critics point out this “slab” system tax was designed in 2000, before the 139 per cent increase in average UK home prices that we have today. A new, incremental rate is progressive but gradual.

Other taxes imposed on developers can also dampen development. When joint venture partnerships form to convert land to housing - in all that entails - investors and builders have to budget for other costs as well:

Planning gain taxes - The objective of land investment funds applied to development is to be granted planning permission to build on land that was previously designated for a lesser (lower value) purpose. Planning gain taxes divert some of this gain to the public sector, which can be a fair way of funding public realm improvements. Some parties are critical of this system, saying the negotiation between developers and planning authorities can be wrought with inconsistency, unfairness, a lack of transparency and lengthy negotiations.

Community Infrastructure Levy - Councils in England and Wales can raise funds for infrastructure from private developers to support public development. It is charged on a per-square-metre of development basis. The benefit to developers of this system (versus planning gain taxes) is that the fee structure is established up front, applicable to all developers without a horse-trading process of negotiations. Planning Resource, an independent planning professionals intelligence firm, provides a current list of CIL charges for developments across the country.

But not all infrastructural improvements are compulsory. Land investors and developers who are strategic land specialists might voluntarily propose and build infrastructure around developments. To do so the developers need to have a fairly good margin on their project.

Individuals and institutions alike look to developers to create value from undervalued land. But all investors are wise to consult with an independent financial advisor for advice on where and how to invest real estate funds.

Detached Home Building is Up in the UK: What are the Implications?

Detached homes are in high demand in Britain by “second stepper” buyers upgrading from their first homes. One step up the ladder allows new people on the first.

There are many variables in how the UK increases its supply of homes to meet the demands of a growing population. Government financing-support schemes (e.g., Help to Buy, Help to Buy Isa, Build to Let, etc.) are showing signs of success, as has the overhaul of the planning process. More recently, incentives for smaller homebuilding firms and an effort to increase the number of skilled workers to build homes have been introduced.

Investors from the private sector too have stepped up their efforts to increase homebuilding, such as when managers of capital growth funds file for land use changes with local councils. They turn unproductive property into residential neighbourhoods, generally because local employers want homes in closer proximity to workplaces.

A new wrinkle in the homebuilding scenario is that in 2014 the number of detached homes rose by 9 per cent over the previous year. This is part of a trend being followed by the National House Building Council (NHBC), which reports that 38,113 new build detached homes were registered in 2014, the highest absolute number in that category since 2004. A total of 145,174 homes were built, making detached homes 26 per cent of the total. Flats and maisonettes constituted 33 per cent of the total registered; semi-detached houses 22 per cent; terraced houses were 18 per cent; and bungalows were just 1 per cent.

This information was met with dismay in some quarters, with complaints that detached homes are more expensive, therefore they do not address the shortage of homes at the lower economic end. Further, because they consume more land they meet resistance from those who wish to limit building on green field and green belt areas.

But certain other variables of the housing market should be considered in this discussion.

These include how Shelter, the housing charity, routinely argues that all types of housing need to be increased. Reinforcing this idea were findings reported in a November 2014 article published by PropertyWire.com, the widely quoted global property new service. These findings, from a report from Lloyds Banks, include:

• Detached houses are the property of choice for homeowners ready to move up the property ladder from their first homes.

• So-called “second steppers” increasingly want four bedroom homes (31 per cent, up from 24 per cent in 2010).

• Homeowners in their first property are staying 19 months longer there than planned (most who want to move up have increasing incomes and family size, or want to add to their families).

• The typical gap between the sale price of a starter home and the purchase price of a second home is £58,400; second steppers fill this gap by savings (37 per cent) and overpaying their first mortgages (41 per cent).

The financing to build the larger, detached homes largely comes from private investment groups such as joint venture partnerships. As they work with local planning authorities to get approvals to build, they have to demonstrate that the demand for housing justifies what is being built. A local employer that needs middle- or upper-management employees needs the housing stock to match, for example.

Putting capital into housing serves the investor as well as the broader economy. Speak with an independent financial advisor about what needs financing and where - and what is likely to optimise your return on assets.

CBI on the UK Housing Shortage: It’s Bad for Business

The million-plus homes deficit in Britain is treated like a social issue. It is that but so much more; leading business organisations have calculated the costs.

It’s conventional wisdom that the UK’s housing shortage is harmful to families. But when people spend too much of their income on homes, or cannot move out of parents’ homes to form new households, it creates a drag on the economy as well.

So says the CBI, “the voice of business,” in its 2014 report “Housing Britain: Building new homes for growth.” According to the CBI deputy director-general, Katja Hall, “Housing is not just a social priority, it’s a key business issue. We see the impact of too few homes being built not just on the front pages of our newspapers but in the experience of our families, friends and colleagues...it also has huge implications for our future economic competitiveness. Businesses need a flexible and mobile workforce, but the high cost of moving home, and lack of decent and affordable housing, are barriers to attracting and retaining employees.”

This is a key driver for those engaged in UK land investment, working to build homes where needed. That almost always is where a local economy is growing and one or several employers want their people to live nearby.

The CBI publication points out that restrictions on land use for new development, a function of the planning permission system has “for decades…caused cyclical house price volatility - a situation that has contributed to macroeconomic instability to the detriment of households and businesses alike.” It also cites statements from Mark Carney, Governor of the Bank of England, who has said that the housing market poses the biggest risk to future financial stability.

The CBI partnered with the Centre for Economic and Business Research (CEBR) to put numbers to these claims. Findings from this and other CEBR research include:

• £4 billion per year - How much extra spending power households would have if housing and commuting costs rose at the price of inflation (the Consumer Price Index), instead of the 56 per cent rise in UK house prices since 2004. That much incremental spending would multiply itself as goods and services are purchased.

• £770 million per year - The portion of that £4 billion that would be saved simply in reduced transportation costs if people could afford to live closer to where they work. That doesn’t account for time savings, which could be substantial. Managers of property funds wisely focus their research on sites that would serve employer needs.

• £5.5 billion - Money spent on suppliers to the homebuilding industry, part of the £12.5 billion invested in land and buildings for homes built per year (based on the 140,000 homes built in 2013, which is only about 60 per cent of what needs to be built).

• 600,000 jobs - Number of people employed in a year when 140,000 homes are built. If 250,000 homes were built, it would bring this up to about one million jobs.

The goals of the CBI are aggressive. They see a doubling of new home building (to 250,000 or more per annum). The business organisation sees it necessary for a “pipeline of land” - the work of specialists engaged in planning permissions - to deliver well-designed homes for sale or rent. Also, innovative financing programmes and an increase in the skilled workforce able to build would further this objective. A simpler and more competitive tax regime, paired with a flexible planning system, are required as well.

Investors in house development understand that both obstacles and handsome returns meet the high demand for homes. What all investors need to do is to discuss their interests in home-development investments with an independent financial advisor.